The all-important 19th National Congress of the Communist Party of China (CPC) kicked off last week in Beijing. In his bold 3 hour and 23 minute address, President Xi Jinping, outlined the party’s priorities for the next five years. If Beijing has its way, China is on a track to becoming an economic power the likes of which we have not seen in a long time. It’s not the Japan of the 1980s, it’s much larger. It’s no surprise then that even the US National Intelligence Council warns that the era of Pax Americana is “fast winding down.” To the Western eye the ascendant power of Beijing may seem a disruption to the status quo, but to students of world history and China, it is the restoration of a millennia-long equilibrium. China was the biggest economy in the world for most of the past 2,000 years, only to be overtaken by Europe in the 19th Century. The ramifications of this Chinese growth are significant. America will almost certainly come out second best if it doesn’t change tack – with Europe a long way behind.
With Brexit and the election of President Trump, a new era is upon us. An era in which the certainties that have held true for decades are suddenly no longer valued. They are vulnerable. Globalization, immigration and liberalism which have defined the last three decades could get undone by protectionism, nationalism and populism. Yes, trade wars could be a reality and, yes, the US and China really could go to war in the next five years. No, their trade relationship will not prevent it. The UKGerman economic relationship didn’t prevent the slaughter at the Battle of the Somme a century ago. However, there is a silver lining. The current populist wave in the US and Europe is not about “pitchforks and soak the rich” and potentially has a positive side to it. Unlike past populist movements that arose from a desire to upend society, today’s movement is driven more by the longing to restore things to the way they were in the “good old days.” In other words, it may have reactionary elements, but it is not truly revolutionary. The grievances if handled correctly, will pave the way for a brighter future. The markets are probably right to think that Trump heralds a friendlier approach to business, in the form of lower taxes and less regulation. The S&P 500 Index (SPX) has been flat since midDecember, as investors take a wait and see approach to the policies of President Trump and their impact on assets.
Hillary Clinton is now favourite to win the US election. If the US economy continues to grow at a pace of +1 to +2% per year (instead of the historical +3% to +4%), then the current economic and political problems will only worsen. Clinton will be acutely aware of this. A growth deficit should be a bigger worry than a budget deficit. Fiscal austerity has to give way to fiscal spending that induces growth. With 30y US Treasurys yielding 2.5%, borrowing to invest should be the mantra. The current economic expansion in the US, which began in June 2009, is now in its 88th month, which means that Trump or Clinton is likely to face a recession early in his or her administration. Equity Bull markets tend to have an expiration date as well: On average every 4.5 years. However, like the economic expansion, this Bull Run is also past its due date and is now seven years old. Does that mean one should sell? Not at all. Seasonally, we are entering the best period for equity markets. November to April is when equities tend to do well, before the May to October swoon. Since 1950, the S&P 500 Index has gained +7.1%, on average from November through April, versus +1.4% from May through October. Monetary accommodation is set to continue. These markets will not be broken by central banks. In many respects the central banks “own” these markets. If anything breaks the market, it will be the upheaval that only politics can cause – the US election, the Austrian election, and the Italian constitution referendum amongst others.
The Brexit vote can be about many things but, at its heart, it’s a vote about the sovereignty of the national Parliament of the UK. Whilst those on the continent (particularly in peripheral Europe), may have come to trust Brussels more than they trust their national Parliaments, at least in the UK sovereignty is cherished and protected. In the eyes of a Brexiteer, the European Union (EU) undermines that sovereignty. I expect the UK to vote (albeit very reluctantly) to Remain in the EU. However, a vote by the UK to Remain should not be construed as an approval of “business as usual.” There was never a necessity for the EU to be anything more than a “free trade” alliance and one can’t deny that the EU’s reach has exceeded political necessity. Whether or not the UK leaves, change is coming. Globally, if loose monetary policy alone remains the saviour, then I am concerned that we may see the next recession in the US in the not so distant future, as job growth slows and drags down with it wages, capital investment and consumer spending. The Negative Interest Rate Policies (NIRP) being deployed by central banks, seem illjudged and a waste of valuable time. Negative interest rates are simply a distraction from what must be done to accelerate growth. The demand has to be injected directly into the economy and not intermediated through the financial markets.
The Facebook IPO has come and gone and it has made Mark Zuckerberg a billionaire – many times over – and a Sucker-berg out of all retail investors who rushed in. Hype is not value. My fair value for a Facebook share is $20; however, I would wait to hear more about the company’s revenue growth plan before buying the stock even if it gets to this level. Greece has proven the point made by Margaret Thatcher about Socialism: eventually you run out of other people’s money. Germany is faced with two impossible outcomes – they take losses on the debt extended so far and suffer from, a rising Deutsche Mark (if the Euro then breaks up), or they tolerate high inflation and bear yet more fiscal transfer, if the Euro carries on as it is. Since it is difficult to work out the cost and benefit of each option just yet; the evidence so far suggests that Germany may be willing to give political integration in Europe a shot. The recent pullback in equity markets globally was primarily driven by the May 6 Greek elections, and fear of a Greece exit (or Grexit). I do not believe either a Greek exit or a Spanish bankruptcy is on the horizon. I am more inclined to believe that further ECB easing and European bank recapitalisation on the scale of the US (think TARP 2008), are the next actions in Europe