Let me apologize for this month’s Insights being late…I’ve been in London. No, it was not for vacation (despite what my wife might argue); rather, I attended CFA Institute’s Annual Conference. The Institute is an organization dedicated to ethics and aptitude in Finance, and in the spirit of continuing education they host a yearly event. Perspective and insight we gain here filters into our work.
The theme of this year’s conference was ‘Disruption.’ Though I found the content valuable, I was puzzled by the mostly negative tenor of conversations. From an impassioned appeal on climate change delivered by Prince Charles, to less-gilded opinions on sovereign debt, to Brexit angst, optimism was sparse.
To that I say most things worth anything were disruptive.Take the car, which disrupted carriage makers but boosted our quality of life. Moreover, even disruptive events can foster positive outcomes. Road construction is a nightmare, but a 2-lane road that becomes a 4-lane highway is a dream. WWII hastened the decline of global Imperialism, and how about our American Revolution! Financial markets ultimately reflect both puts and takes of disruption.
The US/China trade war is disrupting the global economy, and by extension financial markets. The narrative here is negative, but there are some reasons a confrontation might be warranted: ”
- Intellectual Property: China has been siphoning intellectual property for decades, along with generally lax copyright, trademark and patent enforcement. Knock-off handbags might be a joke, but carbon copy jetliners and artificial intelligence platforms will not be.
- Market Access: The United States more/less allows anyone to invest in our companies, buy our real estate, and sell things to you and me. Equal considerations are not afforded to us by China.
- Anti-Competitive Practices:The Chinese State controls all economic interests; in effect, US companies compete against a foreign country. When strategic interests do not align with economic interests, a Chinese firm might overproduce solar panels at a loss to create jobs (i.e. social stability). This action could drive a US firm out of business. Currency meddling and/or manipulation, along with capital controls (limiting the flow money), are policy tools available to China where reform might benefit the rest of the world.
There is always something that comes after ‘disruption’. I cannot tell you for sure that we will be better off when our trade war burns out, smolders away, or is extinguished. I can tell you however, that the silver (or gold!) linings are often misunderstood during the disruptive period. Diversification of our investments ensures we are exposed to companies that benefit when a new normal emerges.
…One could say this month’s Insights were disrupted by my globetrotting. But that very disruption provided our inspiration!
– Spencer E Joyce, VP, CFA
Name to Know for May
British Conservative Party
Boris Johnson is a former mayor of London, and former member of Prime Minister Theresa May’s Cabinet. He is a well-known figure within Britain, and was first elected to Parliament in 2001. Critiques of his persona often portray him in a cartoonish figure.
He is noteworthy this month as a front runner to succeed Theresa May as the next Prime Minister. She will resign on June 7, clearing the way for another leader to move the Brexit process forward. His politics skew toward ‘Euro skepticism’ and a smaller government footprint, although he is economically and socially more liberal.
US Equities: The S&P 500 gained 3.9% last month, but has given most of the move back in May.
Global Equities: Developed and emerging markets gained in April, rising 2.8% and 2.1%, respectively.
Federal Reserve: The Fed is scheduled to meet June 18-19. Rates are expected to remain unchanged at the meeting, but futures imply an 80% chance of a rate cut before 2020.
US Treasuries: Treasuries rallied in April-May and yields dipped. Current yields on 2, 5 and 7-yr notes are below shorter maturities, marking ‘curve inversion.’
US Credit: Investment Grade and High Yield corporate bonds yield an average of 1.37% and 3.98% over Treasuries, respectively. Spreads have slightly widened recently.
Markets Rundown Source: Bloomberg
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