Last week Joe’s theme was that you must avoid the prevailing cacophony of noise, which can be both unsettling and distracting for even the most experienced of investors. Your time and ours must prioritise what is happening in the markets, not in the fast-moving headlines.
Last week Joe set out the evolving trends in global stock markets, in particular the drifting of US equities since Trump was elected versus China. This trend, and the gap in performance between these two giants, gathered pace in the last week.
For example, the growth gap between the US and China over the last month is now 8%, based on the average fund in each sector. It is 4.7% year to date, the point being that the gap is widening, week by week. This differential doesn’t account for another big move last night e.g. Hong Kong up 4%.
The global investment landscape is shifting, and the latter is one way to dispassionately observe that this is so.
The reasons for these shifts are many and various, and why one investor might buy China will be different from another – the most important thing to do is to identify that evolving momentum, particularly when it is new, and not spend overly much time trying to rationalise the actions of other investors.
Nonetheless, the drip of positive newsflow in China has clearly encouraged buying of an already cheap market. In the last week it was a love-in with President Xi and business leaders, even including Alibaba’s Jack Ma, who had been ostracised since a crackdown on the tech sector in 2020. Such a kiss-and-make-up is very important to change the mood music in China.
In contrast, the US has been under pressure from stubborn inflation, combined with doubts over the “US Exceptionalism” which only in December had been the (mostly) unchallenged mantra of the investment banks, “buy US equities in 2025 to the exclusion of all else.”
This change is about more than just inflation and doubts over US tech (or at least doubts over the mouth-watering valuations of the same). Last week Joe posited some of the reasons why gold is being bought, when the textbook says it shouldn’t have been:
“concerns about US debt, distrust of American leadership, geopolitical risks, and the global shift away from the dollar”
Therein lies the clue to the shift in investor perception of US equities and bonds. Trust.
When I first began investing in emerging markets in the late 1980s, Mark Mobius, the godfather of emerging market investing, stressed that he would only invest, inter alia, when he could observe these three vital factors: political stability, reliable application of the rule of law, and robust regulatory structure.
If those three elements were still evident, most investors would act unsentimentally, and overlook personal repugnance of Trump. But within a few weeks of this new presidency, we seem to be way beyond that point.
Each of these elements is under threat in the US under Trump’s leadership (sic).
If we were talking of a banana republic, we could just sidestep the issue, and waste no more time on it. But the global impact of unfolding events is far-reaching, and the risks are real.
The post-Second World War global order is unravelling. Trust in the US government to meet its commitments, whether within the US or globally, is fundamentally blown away.
One great example is Musk calling for “wholesale removal of regulations”. The dismantling of protections introduced after the 2008 financial debacle have already begun. This has the ability to de-stabilise the entire US financial system. More generally, economies are highly complex, and need some level of regulation to provide resilience, and give people the confidence to work constructively within that economy, and attract investors. That resilience is being ripped away.
There is now a corrosive uncertainty, and the evolving market trends of recent weeks might just be the best measurable evidence which we have of that corrosion in action.
There is an important side issue about which no one is talking – the overnight downside risk, and how a hands-off Trump administration might react, if at all.
For example, in the 1987 Crash, the overnight fall in the US was more than 20%. There are significant differences between now and 1987, but that overnight downside risk needs to be considered, and I will return to it in coming weeks.
Turning to more parochial matters, the UK inflation numbers were not great in the last week, though Andrew Bailey of the Bank of England was at pains to point out that this was actually not as bad as expected, and the slowing economy will do its work slowing down inflation and creating a window for rate cuts. We will see. For rates to go lower he needs to be more concerned about slowing growth than stubborn inflation – this is the stagflation conundrum.
Confidence in UK equities was already low, and it needs concerted government action to re-establish the hope of better times which was shared by so many investors, large and small, domestic and global, before the last Budget. That lack of confidence came out in the latest Bank Of America survey of global fund managers, where the UK was the least favoured destination for their money. Such negativity, about a market which is already cheap, is typically a good time to accumulate, though doing so against the crowd is seldom comfortable.
Next week I hope to find a space to share my reflections on India, from which I have just returned.