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The age of anxiety

Ongoing political and economic developments are causing concern among investors.

I was recently in Cape Town to meet with our clients and then attend the annual Allan Gray Investment Advisor’s Conference.

This year, as usual, the conference was kicked off by a 60-minute presentation on the state of the global and domestic economy, brought to us by Allan Gray’s Sandy McGregor.

McGregor always employs an interesting view of the global and domestic political and economic circumstances and how this will affect global financial markets – and his presentation this time was no different.

In the booklet handed out to the attendees the brief for the presentation read as follows:

“’The Economist’ has correctly stated that we are living in an ‘Age of Anxiety’”. We also sense among our clients increasing anxiety about ongoing political and economic developments both locally and internationally. Sandy will discuss the evolution of these developments over the past year and the causes of the rising rates of concern.”

The following are my comments, and observations taken from his presentation:

This is a period of tremendous change; thus, different rules must apply to managing portfolios. There was a sense of “this time things are different” in the way that McGregor was describing the current global political and economic landscape. Often fund managers rely on historical events to observe how best to analyse similar events in the present: a kind of ‘using history to teach how not to do things’ approach. I got a sense that he was telling us history cannot be applied this time around. This was further highlighted by McGregor’s statement that this time affected markets will only be seen in retrospect.

According to McGregor, US President Donald Trump is busy with an assault on globalisation, but this is a global movement and Trump’s assault will not succeed.

The current Trade Wars are having a profound effect on the global economy, with Trump attacking Chinese Tech firms accusing them of stealing US technologies. Trump put tariffs on European goods such as olives and oranges a week ago and is now talking about putting tariffs on German cars.

This is in an environment where global growth has not shown any improvement and where Global trade has been flat since 2017.

China has no trade deficit with any other country other than the US.

The speculation was that because Republicans have lost control of the Senate, Trump now only has two things with which to display his power, trade tariffs and the use of military force.

China, however, is currently growing at 6.25% a historical low, Chinese growth was 14% in 1993.

The Chinese negotiations with Trump have not gone well.

What we must remember is that the Chinese Communists’ priority is to serve the party, then secondly to look after the Chinese economy.

However, China wants to buy more product from the US than the latter wants to buy from China. So, we can deduce that the Trade Wars between China and the US will in the end probably hurt the US economy more than the Chinese. If we then continue from this deduction, if China needs products from the US and the US will be adding tariffs on Chinese goods then China may simply look for the products it needs from the US elsewhere.

The Chinese money supply is down as the country is not pumping money into its economy as it did years ago.

Are we heading into a global recession?

Let us consider the US unemployment rate which was 3.5% in 1970. In 2015 it was 10%, now it’s back to 3.5%.

US inflation is at 2% and this is historically an acceptable inflation rate.

The US long-term bond yield curve is inverted (in other words the shorter-term bond is providing the bond investor with a better yield than by lending money to the US government over the long-term) but the US growth rate is still positive, so the probability of recession is low even though the trade wars are starting to bite the US economy.

Globally, central banks do not have enough capital to pump into their financial markets if a recession comes, and have almost zero power to influence economies right now. This is a concern.

There is at present huge pressure on the US Federal Reserve to cut US interest rates. Stock markets would like it if the Fed cuts rates, as investors would move to trade listed shares to generate the yield they require.

In the Eurozone, interest rates are largely negative right now and the EU might go the same way as Japan and experience deflation.

Across the globe, there seems to be a generational shift in political power. Traditional parties across the globe are getting challenged. In the US, the Republicans may win the US Presidential Elections in November 2020, simply because the Democratic Party cannot find a worthy candidate, thereby also opening the way for independent candidates to come forward.

In the UK, the Liberal Democrats and other smaller parties are getting stronger. The UK (according to McGregor) feels a little like SA before the ’94 elections when SA was stockpiling beans. 

For the EU, it will have to focus on its economic issues once Brexit is sorted like Italy and Greece! There is a big crisis coming in Italy! Italy has very large debts with the EU and a massive banking crisis.

In France, President Emmanuel Macron is effectively wiping out the socialists and overall the younger generation is coming into global politics (Macron is 42; Canadian Prime Minister Justin Trudeau is 48; Boris Johnson is 57. Compared to Donald Trump who is 73 years old, Angela Merkel of Germany is 65 and Vladimir Putin is 67). This may be the reason why Trump, being part of an older generation, is trying to yield as much power as he can.

McGregor went on to discuss his views on the state of the South African economy:

He finds that President Cyril Ramaphosa’s performance has been a little disappointing.

He added that it is quite easy to get pessimistic at the moment, but this is often when the investment opportunities present themselves.

This is a time to be cautious, but not pessimistic.

The gold price in 2006 was $600 where now it has grown to $1500 a fine ounce.

Palladium and Rhodium are both up, this is good for the Rustenburg mining areas.

SA exports are also showing an increase.

According to McGregor, the biggest problem in SA is the lack of skills in government and the brain drain from the country, this is bad also from a tax point of view. The brain drain is not specific to SA and not anything new globally. Skills will normally go to where they are in high demand and where they can generate the biggest income.

Typically, countries that experience a brain drain normally replenish by employing the skills from elsewhere. South Africa could import skills from other countries, and particularly from within the continent.

In closing, McGregor’s address this year was fascinating as always. He has a unique delivery style in which he packs a large amount of information in an hour presentation. I probably missed a few tidbits in trying to listen to the presentation and take notes at the same time. When reflecting on the presentation I got the feeling that yes, we are living in an “Age of Anxiety” in which many countries around the world are facing great challenges and these will affect other countries and economies. 

However, if we adopt a contrarian view, we can look at the current state of global affairs as an environment that presents opportunities.

What we must not forget is our adherence to due diligence and research to ensure that the opportunities we may uncover are true opportunities.

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Michael Haldane

Global & Local The Investment Experts


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