Markets seem to be in decent shape – apparently, the MSCI World Developed has finally beaten its January 2018 high following a rise of 0.7% last week and a 6.8% gain over the last month. This, so far, confirms my hypothesis that we are leaving behind a growth scare – or a pause for growth – which could soon turn into a more pronounced rally. If that is so, maybe its time to stop worrying about that recession? But for equity investors, I think a much more interesting story emerges from the pen of Andy Lapthorne, global quant strategist at SocGen.
Value is back, reports Andrew in his latest note.
“Value stocks have bounced back sharply (as they always tend to do ) and are now performing almost in-line with Quality stock, with the latter rising 18% relative over the summer. With US Quality stocks having peaked in July this year, the surge in equity markets is being driven by all things cyclical, with the likes of Engineering, Autos and Technology Hardware all seeing double-digit monthly gains. Meanwhile, the more defensive Beverages and Utilities sectors have lost money. On a daily basis, US Value stocks have outperformed US Quality stocks 66% of the time over the last month; (a big) if Quality and Value stock valuations were to mean-revert to average, performance would be in the order of 40% in favour of Value. We see full mean-reversion as highly unlikely, but there are clearly valuation grounds for this rally to continue”.
According to Lapthorne his advice for investors remains the same – be careful about quality stocks.
“Expensive higher-quality stocks are at risk of either improving economic sentiment or from being too expensive to withstand an equity market downturn” argues Lapthorne. “ We argued last summer that a ‘sensible’ asset allocation would be US bonds + Global Value as the former protects you in a slump, while the latter provides you with economic upside potential.”
The real problem with Trump
Because we’ve all collectively grown so blasé about Trump’s tweets and outrageous behavior, I sometimes think we’re missing the really big story – the declining prestige of the US. Like many, I was shocked into silence by the betrayal of the Kurds in Syria. Looking at Trump’s foreign policy agenda I think we can all say it is a mess. Iran is back, North Korea is busily causing mayhem, Russia is ascendant, and the Europeans are looking more and more ambivalent. I’d also add that the US still has troops in Afghanistan and the Taliban will no doubt try and squeeze as much out of the retreating adversaries as possible.
China though is the big story. Like many I believed that the Chinese couldn’t wait until Trump was gone – thus they were holding out for a deal with a new boss. I’m not so sure anymore. I think they may have an incentive to reach some kind of intermediate deal with Trump because he serves their interests. Talk to some experts and they reckon the Chinese regard Trump as some kind of America First strategic genius. I’m not quite so sure of that.
I think they’d like Trump re-elected because he degrades the dominance of the US as the global hegemon – which will eventually hit the strength of the dollar many years down the line.
A rather cynical explanation is offered by Nigel Green, chief executive of deVere Group. I’m not sure either of us are great experts on geopolitics but Mr. Greens’ narrative strikes me as convincing. His argument is that the long-term damage Trump is inflicting is incalculable.
According to Mr. Green, Trump’s re-election would suit the Chinese for two major reasons. First, because they will assume that reaching a deal with Trump to end the damaging trade war will probably be easier than with some others. These include Elizabeth Warren, the potential Democratic rival, who could say many supporters, win next year’s presidential election.
“Ms Warren can be expected to be even tougher with China than Trump, and not only on trade, but on other difficult issues, including climate change and human and labor rights. And second, despite the trade war, Trump’s policies and rhetoric have proven to be strategically helpful to China in achieving its longer-term goals. In many respects, President Trump has undermined Washington’s global credibility, international governance bodies and key alliances, and has been indifferent if not antagonistic towards major trading agreements. This all compromises America’s standing as the world’s primary superpower and it provides China with openings and opportunities it has previously never had in terms of global influence and setting international trade conventions. However, U.S. investors should perhaps also question whether Mr Trump’s administration has, in fact, handed China a great strategic opportunity that could damage America’s preeminent superpower status in the longer-term and, therefore, its economic dominance.”