Week 9, 2017 iconBased on the last couple of decades, it is easy to understand why investors are hesitant to believe promises of double-digit returns in risk assets. Historically, the likes of equity did very well through periods of reflation though, which justifies ringing the bell (currently blowing the trumpet seems more apt) for this asset class, amongst others. Screening 46 countries (as shown in the chart below), only three had negative Real GDP Growth in late 2016, hinting that the impending reflation cycle was already picking up before Mr Trump moved into the White House. The focus here, though, is on the President’s promise to get the US up to 4% growth, and the implications thereof.

Week 9, 2017 - Chart 1

The financial markets would seem to be buying into Trump being able to deliver on that promise, so the next logical step would be to figure out which investments should benefit most, at least from our perspective. Growth is only one part of the plan, so, for now, let’s assume the fiscal spending required to get the growth engine moving is managed efficiently and focus for a moment on the other part of his plan – protectionism. Trump was essentially voted into office on an anti-establishment vote, as the electorate supposedly became tired of struggling while, in their view, others were benefitting at their expense. Needless to say, the same “masses” will be very irate if charity does not start at home and any spending on helping those in need outside of the US borders may be out of the question. This is obviously a terrible outcome from a humanitarian point of view, but does not necessarily impact the prospects for financial markets in a negative manner.

Trump’s promise is to discourage imports is not aimed only at goods, but also, it would seem, people. This is something that does impact financial markets, not so much in an overall positive or negative way, but more in influencing where one would want to be exposed from an investment perspective. One of the potential ramifications of this is an end to globalisation and that US growth will not spill over to the rest of the world, so tilting one’s geographic focus in investments towards the US is a ‘no-brainer’. The US Stock market is already, comparatively, quite expensive though, leaving very little margin of safety. That said, it is hard to see just how it is even possible to retain all of that projected growth within US borders, without any of it spilling over.

Within the US, non-US labourers exist simply because they are willing, or desperate enough, to do the work for a fraction of the price of people that are used to a developed market’s living standards. Outside of the US and other developed countries, this is the reality of life for many places across the globe.

Week 9, 2017 - Chart 2

 

The same goes for goods. Anything purchased that is not produced domestically is due to at least one of two most elementary economic reasons: it is either a cheaper or a superior product. By taxing imports, in whatever way or form, those goods will simply become more expensive or lower quality. The world has already become too interconnected to stop the momentum in globalisation, as most of us already live in “the global village”, spending large proportions of our money online and on established global brands. From an investment perspective, the traditionally safe sectors/areas associated with these trends have had enjoyed prolonged outperformance, leaving them expensive. The graph above shows different areas’ returns over the last five years in USD, where the US market doubled in value whilst Emerging markets have shown zero returns.

The risk/reward payoff of investing in sectors or regions that have underperformed substantially looks very appealing, given their greater upside potential and the same (if not lower) downside risk as historically “safe” sectors. This is even more that case, if you believe in a positive contagion effect from US growth. The two major areas in this “value” space of the market are Emerging Markets and Europe, where the latter has its own set of problems, which is the topic for a whole other discussion.

Though, one has to assess which areas in the former will benefit most, as the term “Emerging Markets” covers a very diverse array of constituents. Many have nothing in common with one another, and other areas derive most of their income from Developed markets. Looking at these markets’ drivers, rather than just grouping areas together on archaic ideas (based on geography, for example) can currently add immense value in my view. Widespread research suggests that the likes of Russia and Israel will benefit most, whilst the Ukraine and Mexico will get the short end of the stick, but I think it is safe to say that many opportunities will arise for areas to invest in and avoid over the coming years. It seems a certainty that the mundane years are behind us and the status quo is changing, most probably skewed towards positive opportunities in Investment markets.

Blowing the Trumpet for Global Growth

 

 

 

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