There is a global slowdown happening, particularly in the manufacturing sector. On the other hand, consumers, particularly in the U.S., are still healthy but on the margin the economic data has gotten less optimistic. There’s also the inverted yield curve which gets a lot of media attention. This is largely due to slowing economies but exacerbated by global flows into relatively attractive yield instruments in the U.S., which drives down our yields further than they might otherwise be. Finally, we have the trade war and protectionist policies by the Trump administration. Creating a trade war into a global slowdown doesn’t sound like a good idea. Yet here we are. There’s a lot to unpack on this topic so let’s tackle it from a variety of angles
First, the trade war:
No one wins in a trade war, particularly not the consumers that are paying higher prices. The U.S. is pushing back on China with regard to intellectual property (IP) theft and fair-trade policies. China was well behind in technology innovation and started to play catch-up using a “copy-cat” policy. They took great ideas, copied them, almost to the letter and adapted them for Chinese culture. The White House would like China to admit to and stop IP theft and to make trade fair in both directions. Sounds good on paper but this is a very complex situation that is not likely to be solved any time soon.
Second, the markets:
There is no comp for the current situation we find ourselves in: we have roughly $14 trillion in negatively yielding bonds around the world. Money chases opportunities so in a world where there’s no yield in many bond markets, flows come to U.S. shores seeking perceived safety and positive yields. That causes our bonds to rise in price and fall in yield. In a negative feedback loop, the falling yields and yield curve inverting causes concern for a recession. This causes multi-asset volatility to rise, creating more concern. This is the cycle we are likely to stay in for a while.
The fear & loathing for equities has me more interested in buying. Equity flows are terrible, and sentiment seems even worse. Historically that’s offered a strong contrarian opportunity. With algo’s and dark pools doing 80% of the daily volume and having no logic or reason driving decisions, higher volatility spasms seems a safe bet. As a former trader, I am very comfortable navigating these environments and like to use volatility to upgrade portfolios.
Third, interest rates:
The entire recovery since 2009 has been sub-par. Normally average GDP is 3.2% for a full cycle, the U.S. experience has been more like 2.2%. With growth slowing and global flows driving down U.S. yields, rates could stay low for a lot longer than people think. Housing and housing related stocks tend to perform well when rates fall, particularly when the economy is out of recession. Housing stocks have some of the easiest comparisons going forward so we like this area. Home Depot, Sherwin Williams, Lennar & DR Horton appear to have strong tailwinds.
Fourth: Where do we see current opportunities:
We see opportunity in the most relevant brands serving global consumers with a few themes being very attractive:
* Wellness and athleisure – As a lifestyle, athleisure is a powerful theme. Names like LuluLemon, Nike, and Adidas come to mind as having strong opportunities. From an aging and wellness perspective, Amgen, Bristol Meyers and Abbott Labs appear very well positioned.
* Digital payments and e-commerce – Cash is going extinct all around the world in a variety of ways. The beneficiaries are well positioned for the future of e-commerce & mobile payments (Amazon, Alibaba, Tencent, Visa, Mastercard, and PayPal)
* Discount merchandise and apparel – as the economy slows, consumers tend to shift their buying habits in favor of being cost-conscious. There’s some wonderful brands well positioned for a cost-focused consumer: Costco, TJX, Five Below, the Dollar Stores offer strong opportunities.
Fifth: What do the trade wars mean for U.S. companies that do business internationally?
There’s certainly evidence that corporations are freezing expansion plans given the uncertainty in different regions. U.S. companies operating in Europe should continue to see a slower environment and U.S. companies operating in China could struggle as nationalism begins to take hold. The strongest brands, the ones that have been operating in China for long periods of time, still seem to be thriving. Companies like Nike, Starbucks, LuluLemon, Ferrari, Apple and Shake Shack continue to thrive and find new growth opportunities.
Sixth: Is there any resolution to the Trade Wars in sight?
I want to be an optimist on this topic, but I just cannot see a meaningful deal happening between China and the U.S. any time soon.
Seventh: What does this mean for investors?
- Investors should expect continued bouts of volatility clustered over very short time periods for the foreseeable future. Be opportunistic when you see large short-term drawdowns.
- Investors should focus on the highest quality balance sheets at this part of the economic cycle. Heavily levered companies tend not to perform well into economic slowdowns.
- Growth stocks should continue to outperform as growth continues to be hard to come by.
- The most relevant brands serving global consumers should continue to thrive with low unemployment, increased wage growth and relatively strong consumer confidence. The consumer continues to be a bright spot as the manufacturing economy struggles.
- Caution is warranted where perceived “safety assets” are concerned. As rates fall and the risk of recession rises, money flows into defensive assets driving up valuations to unsustainable levels. That’s how bubbles form and I continue to believe “safety assets” will prove to be much less safe than people think.
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all the securities purchased, sold or recommended for client accounts.