Note August 25,2019: Jackson Hole & G-7 Over,Challenges Remain – Market expectations seemed globally that conditions underway since 2009 would in late 2019 continue. Nonetheless, challenges remain. Unlike prior G-7 emphasis on commonality of purpose but like 2018 in Canada also, the G-7 of 2019 at Biarritz France has aired disagreements. A swathe of political uncertainties remain, from trade to geopolitics and in between. Far from genteel, personal attacks among leaders appear escalated and which could stymie compromise efforts.
Central bank gatherings like those at Jackson Hole, Wyo. U.S. appear less rigid after a low point in 2007 when alternate views were greeted with mirth and disdain. In Europe, the ECB appears most fervent on further ease, replete with negative sovereign yields widening. Monetary ease may indeed develop but a so-called monetary put to buttress markets may still not come to pass. In the current iteration at Jackson Hole of August 23-24, 2019, the Federal Reserve appears both suggesting further ease was possible while also expressing concern about its effectiveness given the tussles over trade. Policy confusion appears present.
Currently, fixed income yields are already low, even for this cycle. The reality of equity valuation being elevated cannot be justified only on there being no alternative but does likely indicate some optimism about earnings growth. With earnings such as for the S&P 500 already beyond the steep acceleration of a recovery phase and now in a more mature expansion phase below the long term of 7% annually, more volatility looms ahead.
Across sectors as a late cycle phenomenon, bifurcation in company delivery seems steep. After years of disdain, security selection is likely coming to the fore. A quality tilt seems appropriate, alongside cash reserves and an overweight in precious metals with political and monetary risk levitating.
In the runup and after the G-7 heads of government meetings in 2019 at Biarritz France, politics remain convoluted. In a trend seen at the G-& meeting in June 2018 in Canada as well, more emphasis has emerged on disagreement. It is in sharp contrast to the efforts at prior G-7 summits to present a vision of commonality of purpose. Currently with the change in prime minister in Britain, the Brexit challenges in Europe have entered a new phase. The deadline for Britain remains of exit from European Union decision at October 31,2019. For the European Union (EU) and the sanctity of its structure, maintaining its internal contours remains key not just in relations with Britain but also in EU relations with other regions. The new British government appears bent on testing these parameters even at this late hour. Meanwhile, the British government itself remains at risk of new elections and/or a new referendum on exit. Further, the Italian government has also fallen over policy issues. Reinjecting Russia into the G-7 has been mooted. A larger issue remains for the world economy that the U.S./China trade talks appear far from conclusive and more realistically, appear evolving into a tussle over geopolitical rivalry. In fact and far from genteel, personal attacks among leaders appear escalated and which could stymie compromise efforts. Meanwhile in expansion of such tensions, the Japan/Korea tussle has now has flared from differences over wartime compensation to trade favor withdrawal and now to withdrawal of intelligence sharing even as North Korean tensions remain. In the ever present tensions from the Levant to the stresses over Iran sanctions spilling over into the G-7 meeting of Biarritz, now to be considered are Syrian bombing of a Turkish military convoy. In South Asia, as well, new elements emerge as U.S. withdrawal from Afghanistan is delineated and separately, tensions appear elevated between Pakistan and India over Kashmir. It seems to us that a wide swathe of political uncertainties from trade to geopolitics and in between remain for the latter half of 2019 onwards.
Central bank gatherings like those at Jackson Hole, Wyo. U.S. appear less rigid after a low point in 2007 in which alternate views were greeted with mirth and disdain. In the current iteration at Jackson Hole of August 23-24, 2019, the Federal Reserve appears both suggesting further ease was possible while also expressing concern about its effectiveness, given the tussles over trade. Policy confusion appears present. Interestingly, amid the longest and most extensive quantitative ease program for over two decades, the Bank of Japan has appeared willing to pause. Notwithstanding allegations of currency targeting, the reality from the Peoples’ Bank of China appears to have been on cutting the cost of credit for companies in a bid to boost growth and activity. Some emerging country central banks like those of Turkey and Argentina have been pressed by markets via exchange rates but many others such as in India also appear focused on domestic credit conditions. Smaller advanced countries appear either to have reduced rates modestly or remained relatively flat. The European Central Bank appears in a different category from all of the above. As growth in Europe appears generally slowed, it has sent signals of another expansion in quantitative ease even as fiscal pressures appear in countries like Italy. In turn, negative sovereign bond yields have expanded substantially in Europe.
Earlier market behavior in 2019 has suggested further central bank ease as being anticipated globally as being favorable and has been the case since 2009. Monetary ease may indeed develop but a so-called monetary put to buttress markets may still not come to pass. Even in comparison to this cycle, fixed income yields are already low. Notwithstanding large quantitative ease programs, considerable portions of sovereign fixed income remain in private hands and which in theory could be used to impact markets. In that market pricing stream, there has been a notable expansion in negative yields in European sovereign fixed income as well as decline in such yields elsewhere. It suggests some focus on safety of capital rather than return on capital. However, at the margin and despite negative market yields, the lackluster demand on issue for zero coupon 30 year German bunds indicates some changes already may be at work
The reality of equity valuation being elevated cannot be justified only on there being no alternative but does in all likelihood indicate some optimism about earnings growth. With earnings such as for the S&P 500 already well beyond the steep acceleration experienced in a recovery phase and currently in a more mature expansion phase below the long term of 7% annually, more volatility looms ahead. Across sectors as a late cycle phenomenon, bifurcation in delivery seems steep in company reports. In the latest iteration of corporate commentary on their delivery of results, ranged from Information Technology to Consumer Staples and Discretionary, some individual companies report gains in advantage while others discuss weakness and the need for restructuring. We see these realities as reflecting a classical late cycle phenomenon in which differences in management capabilities get magnified. After years of disdain, security selection is likely coming to the fore. A quality tilt seems appropriate, alongside cash reserves and an overweight in precious metals. StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.