Investing During Volatile Times in Geopolitics and Markets
The trade dispute between the US and China is one of multiple conflicts around the globe with the potential to upset an already weak global economy. Brexit, escalating tensions between Saudi Arabia and Iran, Turkey’s military campaign in Syria, and protests in Hong Kong all represent destabilizing forces that could affect some of the world’s largest economies.
At Tiedemann, it’s our mission to sort through often dramatic-sounding noise and to hone in on important fundamental data to understand which of these events have long-term significance for our outlook and asset allocation. We rely on informed internal economic analysis and research from world-class third-party providers to help us understand how these events do or do not impact the fundamental long-term outlook for major asset classes and, more importantly, our core holdings.
While significant events and risks abound, we maintain a largely constructive view of the world economy and see, region by region, opportunities that may be overlooked in the morass of current events.
Prior to the trade war, many investors were concerned about the health of China’s financial system as debts related to credit-fueled stimulus applied in 2009 has grown towards maturity. While China’s national debt is benign at around half of GDP[i], China’s total debt (corporate, household and government) is valued at 3X the country’s annual economic output.[ii]
Though the trade war now commands attention, the risk of household and corporate insolvencies within China, which could negatively impact the economy, remains unaddressed. Meanwhile, the trade war between China and the U.S. has slowed China’s growth, though its 6% annual rate remains in the target range of China’s government.[iii]
Tiedemann believes that long-term investors should maintain exposure to the world’s second largest economy, focusing on sectors of the economy that the Chinese government intends to stimulate and support such as technology, healthcare and education, which are also bolstered by continued strong employment and consumer confidence in the region. Over the last decade, these sectors have produced some of the world’s most impressive growth stories.
In late September, the world wondered about the possibility of conflict between Iran and Saudi Arabia. Political and military events in the region are moving quickly and oil price volatility has surged, though large price increases have just as quickly receded. For example, when Saudi Arabia’s oil facility in Abqaiq was attacked on September 19th, oil prices rose as much as 20% intraday. Investors who sold assets or purchased oil or stock in oil-related companies on the news were likely surprised to find that within a few weeks, oil prices had fallen 4% short of pre-attack levels.[iv]
Oil price spikes make headlines, but only sustained and extended price gains may impact the fundamental data and thereby our outlook and core holdings. In our analysis, the probability of sustained price gains cannot be reasonably estimated at the time of an attack, particularly given the complex countermeasures that other countries might take, such as the U.S. releasing oil from its strategic reserve.
Growth in India has been on par with China’s for the last five years at an average 7.5%[v] and (recently re-elected) Prime Minister Narendra Modi’s government has successfully pursued economic reforms that have improved business conditions and have led to a fast-growing middle class. While all emerging markets have recently faced the twin headwinds of the trade war and fears of slowing global growth, India’s stock market has been the worst performer among large emerging markets countries, though it is no longer posting negative returns. While India’s GDP growth has slowed modestly, we believe that the impact of the trade war is less significant to India than others fear, and we see an opportunity in a growing economy where the government continues to make reforms that are attractive to investors.
The United States
Next year’s elections in the United States have the potential to trigger extremely divergent policy outcomes depending on which candidate prevails and which party controls Congress. Corporate management teams face strong incentives to hold off on major projects given the degree of uncertainty over future economic policy in the world’s largest economy. We expect episodes of market volatility over the next few quarters as investors grapple with the impact of different electoral scenarios on politically sensitive sectors such as healthcare, energy, financials, and large technology companies. Tiedemann has low exposure to these regulation-sensitive sectors as most companies within these sectors lack the consistent profitability, long-term growth prospects, and balance sheet strength. Our active managers find opportunities and bring value by investing in companies that are driven by business fundamentals rather than politics, monetary policy and macroeconomics (e.g. oil price, interest rates, government reimbursement rates).
While near-term events are inherently volatile and difficult to predict, time gives us a chance at perspective. We have a history of using fundamental data to identify what news will and won’t impact our core holdings to inform effective long-term decision-making and asset allocation.
This information is being provided by Tiedemann Advisors, LLC (“Tiedemann”) for illustration and discussion purposes only. It is provided to discuss general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It is not intended to be, nor should it be construed or used as, investment, tax, accounting, legal or financial advice. This information is not designed for any particular client or type of client and Tiedemann’s services may not be suitable for all clients. Economic and market forecasts presented herein reflect our judgment as of the date of this presentation and are subject to change without notice. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Any references to benchmarks or other measures of relative market performance over a specified period of time are provided for your information only.
[iii] Source: Bloomberg and REUTERS
[iv] Source: Bloomberg
[v] Source: Bloomberg