Escalating tariff announcements, lower monetary and fiscal stimulus, and emerging market contagion fears have served to shake market confidence in the global growth story. However, we believe in continued strong global economic growth. Manufacturing activity and labor markets are strong, while wage growth hasn’t crossed into inflationary territory (yet). The IMF estimates 3.9% real GDP global growth for both 2018 and 2019. Those are good numbers. Citibank’s Economic Surprise Indices for the globe and the developed world have bounced off their lows in June and are hovering around breakeven. The Eurozone, in particular, is rising strongly.
Strong U.S. GDP growth and rising U.S. interest rates have led to a surprisingly durable rally in the USD. It appears that in the end President Trump truly wants zero tariffs across the board, but the next few months getting there could be rough. European and Mexican discussions have gone well, while China, not as well. Canada hangs in the balance. In a 0% tariff environment, President Trump believes America wins. In order to bring our trading partners to the negotiating table, he erects tariffs. They want access to our market, so after some tough negotiating, the bilateral tariffs are likely to drop. We may be headed for a parallel universe where the U.S. and China trade freely with several partners, but not with each other. It would be unfortunate if the number one and number two economies do not trade harmoniously with one another, but if the world had lower tariffs overall, the negative impact is likely limited. Negotiations between the U.S. and China will probably have to wait until after the Mid-term elections. Both Presidents Xi and Trump want to see how they turn out to determine the political strength of the U.S. President. Recent legal realities do not aid the President.
Emerging Markets are attractive – but selectively. We still like China and Mexico. Our favorite sectors are Energy and Industrials, on a relative basis. We are less disposed towards Staples and Telecom. Cyclicals represent better relative value here versus growth today, as the valuation differentials are at post-crisis highs. However, with more disruption in the world than ever before and with no sign of it letting up, there is risk of buying companies who lose their economic moats. We remain vigilant not to buy value for value’s sake nor growth for growth’s sake. It is a time to maintain our laser focus on the bottom up fundamentals of our investments, while keeping an eye on the surroundings.
Opinions represented are subject to change and should not be considered investment advice. Forward-looking statements are necessarily speculative in nature. It can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes.