US President Donald Trump’s trade war, combined with a slowdown in economic growth in China, are likely to generate the most uncertainty in financial markets this year, Platinum Asset Management chief executive and CIO Andrew Clifford states.
While there are a number of risks on the horizon carrying over from last year, the loss of momentum in China and the US trade war are shaping up to be the most prominent, Clifford notes.
Others concerns carrying over from last year include: rising US interest rates, especially amid fears of inflation being fuelled by tax cuts that added stimulus to what was already a buoyant economy; the impact that funding the increased fiscal deficit could have on the US bond market; how the world’s central banks will extricate themselves from their money-printing exercises; and other politically inspired skirmishes, such as Brexit.
In his latest macro overview, published this week, Clifford notes that the impacts of China’s slowdown have been felt far beyond its borders.
“While China today is the world’s second-largest economy…it is for many goods the world’s largest market,” Clifford writes in the overview. “Not only is this the case for commodities and raw materials, such as iron ore and copper, it is also the case for many manufactured goods, from cars to smartphones to running shoes.
“Indeed, it would be difficult to think of a physical good for which China is not the biggest consumer in volume terms. As a result, China’s slowdown has been felt globally and has been a significant factor in the loss of economic momentum in Europe, Japan and many of the emerging economies.”
An important lesson from the last four years is that a maturing Chinese economy has become more responsive to domestic interest rate movements and credit conditions, Clifford notes.
A lesson from 2018 was how important China has become to the global economy, he states.
“For the last 30 years or more, the US economy and financial markets have been at the centre of every analysis of global markets,” Clifford notes. “It has long [been] a cliché to say that ‘when the US sneezes, the rest of the world catches a cold’. In 2018, the US economy was in great shape, yet the rest of the world slowed, because of China.”
The one country that has appeared immune to China’s slowdown so far is the US; however, Clifford notes it has had the benefit of a fortuitously timed fiscal stimulus in the form of tax cuts.
The greatest risk facing the global economy is that the last driver of growth, the US, is now poised to slow, Clifford states.
“Housing and auto sales have fallen in response to higher interest rates,” he writes. “The benefits of the tax cuts have, for the main part, been expressed. The impact of tariffs on business is now being felt. While their direct impact on the US economy is perhaps not significant, the tariffs and the broader trade tension likely have begun to affect both consumer and business confidence, particularly as we await the outcome of the US-China negotiations.”
Furthermore, the political environment in the US following the mid-term elections is also likely to be a drain on confidence and the partial shutdown of the US federal government over funding debates may well be a prelude for the slower pace to come, Clifford adds.
“While similar shutdowns have occurred in the past, with relatively minor disruptions, they certainly add to the distractions faced by both businesses and consumers. President Trump’s infrastructure program could potentially be the next boost to growth, though it [would be] unlikely to have much impact within the next 12 months, even if it were to eventuate.”
As for interest rates, while the Federal Reserve has signalled that it will slow the pace of rate hikes, rate cuts appear a distant prospect, Clifford writes.
“Many commentators have been focusing on the likelihood of a US recession, but it is beside the point,” he notes. “The conditions are in place for a progressively slower environment in the US throughout the course of 2019.”
In his macro overview, Clifford outlines how he plans to navigate this year’s challenges. He also offers tips for investors.
“At turbulent times like this, we will fall back to an assessment of the potential returns implied by the valuations of our holdings,” he explains. “Simply put, we will consider the earnings or cashflow yields that our companies will provide investors over the next five years and beyond. While there is no certainty regarding these future earnings, and the prospects of some of our holdings over the next one to two years may have diminished from what might have otherwise been expected, the valuations across these out-of-favour sectors are highly attractive today.”
Clifford notes that attractive valuations – low prices relative to prospective earnings – are not a guarantee that stock prices will not fall further, especially over the short term.
However, he continues: “The expected returns from an investment are not some ethereal concept – returns will flow to investors’ pockets where companies pass their earnings on to shareholders in the form of dividends and/or stock buy-backs.
“Alternatively, at the right price, knowledgeable buyers may appear and buy out the company from shareholders. In short, based on our assessment of the current valuations across the companies we own, we believe that our portfolio offers good prospects of favourable returns. What we feel less certain about, however, is the time frame over which these returns will be realised, which is difficult to assess, given the numerous challenges facing the market today.”
