“Invest where the winds are blowing….”     October was a pretty rocky month in financial markets worldwide – that won’t come as news to anybody. In the major markets, a broad description would be that after rather significant erosion for a month, early November has seen the beginning of what may be a recovery with US, UK, Australian, and some European markets around the levels of earlier in 2018. Exceptions include Germany which sustained heavy losses putting it back to its late 2016 levels and Hong Kong which has been on a steady decline since June putting it back where it sat in mid-2017.

But with all this going on around us, we were in the fortunate position in October to not only score a prized seat at this a fantastic presentation from Hamish Douglass (Magellan Global), but also to have Hik Chadirchi from Ausbil Investment Management present directly to 40-odd Solace Financial clients here in our offices in Creek Street.  I thought it handy to summarise their thoughts for you:

Markets:

Hamish and Hik both thought that while markets had been elevated, certainly pre-October, nothing is anywhere near bubble territory.   Hik provided two very helpful slides (see below) that put the recent corrections in the US and Australian markets into context, And added that he expects market volatility to remain very high however Company earnings growth still supports Australian share values.

Hamish remains very cautious though from a global point of view.  Both gentlemen identified the rising interest rate environment around the world as the main issue that could cause significantly different outcomes in markets: Hamish in particular voiced a concern that markets could react badly and significantly so if the US Fed raised rates at a faster than expected pace.  But he viewed it as equally likely that interest rates would rise in a measured and manageable way in which case volatility within the usual range could be expected.

Both cited examples of continuing global economic strength.  The US economy is very strong, Europe is consolidating sustainable growth and the Chinese economy has slowed but the government is financing US$200 billion in the second half of 2018 to guarantee existing infrastructure projects and initiate new ones into 2019.

Unsurprisingly given that both are active investment managers, they noted that great opportunities to invest always present themselves during these times of volatility. Hamish in particular was very optimistic about the revenue opportunities in some of the world’s larger ‘brand name’ companies including Alphabet (Google), Starbucks, and YouTube.   “Avoid disruption, and invest where the winds are blowing”.

Trade Wars & Politics:

Ausbil and Magellan both noted various geopolitical tensions, Brexit uncertainties, and Eurozone membership instability as being concerns for sure, but the US/China trade tensions received most attention given the coverage the issue is receiving in the mainstream media.

Hik noted the trade wars were a concern but that reciprocal trade deals are still being done and arrangements are being made, for example the remodelled (or at least renamed) NAFTA agreements between the US, Mexico, and Canada.

Interestingly Hamish views the trade wars as two separate issues – the 1st is between the US and its allies; and the 2nd is with China.   His view was that it is almost entirely a US domestic political issue around trade deficits and jobs. Citing the minor changes in substance to the agreement formerly known as NAFTA, their view is that the US will continue to do deals with its allies and sell it at home to their political base.

China is a different ball game – they are a major strategic threat to the US because with their rapid economic growth they naturally seek to become more powerful and influential in all aspects of world politics. Economically their aim is to be a global manufacturing and technology leader (refer ‘Made in China 2025’) and Magellan’s view is that they won’t make major trade concessions that could jeopardise their big plans. They could elect to take a patient view and wait out the Trump administration or they could be more argy-bargy to come. I guess we wait and see.

Sources:  RBA, MorningStar Research, Ausbil Inv, Magellan Global, Bloomberg.