Lots of talk this week about the slower forecasts in China and what the impact of trade wars might be. Can we make sensible predictions on any of this or will the stock market defy logic like a truculent Pantomime Dame?
This week Aviva Investors announced that it has reduced its overweight position in emerging market shares. They feel less positive about the region when compared to other markets, and looking more specifically to China, many commentators feel that the ‘growth at all costs’ mantra is in the past.
The US is growing strongly. This suggests that the Fed doesn’t need to maintain such low interest rates, which act as a sort of Viagra for the economy. Aviva’s crystal ball suggests that the US is likely to raise interest rates another six times before the end of 2019. SIX TIMES! That’s more that Dame Joan Collins’ weddings. In the trade, this is known as ‘a lot’.
Every investor makes a risk/return trade off and so US interest rates impact other markets. If you know the stable US markets can pay you a higher certain interest rate, the less inclined you are to chance your lot in riskier emerging markets.
There’s another shadow hanging over China. Trade.
US tariffs on $34bn (£25.7bn) of Chinese goods have come into effect. China has retaliated by imposing a similar 25% tariff on 545 US products, also worth a total of $34bn.
If the current spat becomes a full-blown trade war between the world’s largest two economies, growth expectations would fall sharply for large exporters – and that includes China, Japan, Emerging Asia and the Eurozone. Another reason why this week Aviva has dialled down their holdings in these markets, in their ‘have a little bit of everything’ products (otherwise known as multi-asset funds). Everyone will be watching to see how this spat escalates.
Closer to home fund manager Neil Woodford (the nearest thing to a Hollywood star that older blokes in suits who are good at Maths, get) has sent his June update this week. He also thinks China is going to slow down; he’s less keen on Europe than many and thinks their growth is a belated response to abnormally low interest rates and won’t be sustained. But he is more upbeat than most about the UK. Unemployment here is at a 43 year low, inflation is coming down and wages are growing.
He is a bit of a lone wolf at the moment. His flagship fund has had a shocker of a year, down 13% against a FTSE 100 which is up by 4%. He’s held some problem children such as Capita, Purple Bricks and Stobart – all down significantly over the year for various reasons. At the same time as the unimaginative (and the index trackers) just watch Amazon, Facebook, Microsoft, Tencent and all the other global biggies just keep trundling up. He needs to keep talking a firm game to justify his contrarian stance, and a basic conviction that he is right whilst most others are wrong. Some of his clients have lost the faith.
One critic on his blog writes, “I’m reminded of the quote by John Maynard Keynes - The Market Can Remain Irrational Longer Than You Can Remain Solvent.” This is a great quote. Whether or not time proves Woodford right as it has in the past, this is a pertinent reminder than global markets (full of earnest economists in violent disagreement about whose theory is right), are actually more Pantomime Dame than academic – fuelled by emotion, greed and sentiment. Trying to predict the future is not just a game of facts and logic.
So although it seems as though Emerging Markets are entering a slower time, China in particular has a tough road ahead. With little certainty anywhere in the world, spreading your bets around with a well-diversified global mix still sounds like the best path for most of us. An appropriately on brand Boring comment to close with!
Have a great weekend. I’ll be watching my new surprise favourite Jordan Pickford, who makes me feel quite bizarrely maternal and has made me temporarily suspend my dislike of peacock footballers, as I bow to his nerves of steel!