At the Morningstar Investment Conference held in London this month, asset managers share their views on four questions:
- When will the next U.S. recession hit?
- Is BRI a threat to Western economies?
- Where do you think China is today?
- What are you expecting from FAANGs over the next few years?
Is the BRI a threat to Western democracies and economies?
Background: In 2013, Chinese President Xi Jinping announced the launch of both the Silk Road Economic Belt and the 21st Century Maritime Silk Road, infrastructure development and investment initiatives.
The BRI consists primarily of the Silk Road Economic Belt, linking China to Central and South Asia and onward to Europe, and the New Maritime Silk Road, linking China to the nations of South East Asia, the Gulf Countries, North Africa, and on to Europe.
The project termed the Belt and Road Initiative (BRI), is one of the most ambitious infrastructure projects ever conceived. It harkens back to the original Silk Road, which connected Europe to Asia centuries ago, enriching traders from the Atlantic to the Pacific.
Answered by: Brian Byrne, a Futurist and the President of Aviador and Associates
It's both the threat and an opportunity in war gaming terms.
China is building a replica of the Marco Polo Silk Road combined with the Roman empires essentially and they're bringing on board a number of countries, a number of players that historically have been very important in terms of world trade. They're now talking to Italy which is quite interesting as that was the seat of the Roman Empire.
They are recruiting Southeast Asian nations to invest, take on debt to create this entire ecosystem, if you will, of a new world trade system.
So, yes, it's important. It's a threat because their Belt and Road map doesn't include North America.
Where do you think China is today?
Background: China's economy grew at its slowest pace in 28 years in 2018, with GDP expanding 6.6%, down 0.2% from the previous year. The last time economic growth was so tepid was 1990, when the economy slumped in the aftermath of the Tiananmen Square incident. China’s economy, which has generated nearly a third of global growth in recent years, has fueled anxiety about risks to the world economy.
Answered by: Karen Ward, Chief Market Strategist for EMEA at JPMorgan Asset Management
Investors must “stop obsessing” with the U.S. and start to focus more in China as a barometer of global economic growth.
The US has hitherto been the single biggest determining factor used by investors, market commentators and asset allocators when deciding which way the global economy is likely to head. In the 1990s, it was right for us to just focus on the U.S. because it was the main contributor to global growth. That’s led to financial maxims like “when the U.S. sneezes, the world catches a cold” and “don’t fight the Fed”. Now, investors should add “don’t fight Beijing” to their armoury.
The U.S. is simply not the financial epicentre it used to be. China is the main impulse through the global economy, so we have to spend more time thinking about what’s going on in China. You only have to look at last year to see that: the U.S. was booming, and yet the rest of the world had a pretty awful year and that was because of China.
About what caused the downturn last year, I think the big part of that was China. China slowed quite sharply last year, and it was self-engineered. Beijing wanted the Chinese economy to slow, but it did turn out that combined with the U.S. trade hostility, the slowdown was sharper than they had hoped. The ripples of the Chinese slowdown were felt very broadly and particularly in Europe. It's encouraging to see that the Chinese authorities are re-stimulating the economy.
Much of Europe’s companies gain a large portion of their revenues from China and the country’s growing trend for urbanisation and premiumisation. Therefore, China’s difficult 2018 meant it was also a hard 12 months for Europe, which, on a stock market level, performed similarly to emerging markets. It also saw Italy slip into a technical recession with two consecutive quarters of negative growth, with Germany and France both narrowly missing out on the same fate.
Countries like Germany have completely re-oriented themselves in the last decade towards the emerging markets, as emerging economies is where most of global growth is going to come from. But it does leave them vulnerable in the shorter term to any slowdown in China, which we saw last year.
Europe is also at the mercy of volatility in broader emerging regions. For example, Germany is highly dependent on Turkish demand for its exports. Turkey, too, had a horrible 2018 and Germany’s exports to Turkey have fallen by a third.
That exacerbated a wider trend of collapsing export volumes for European countries, particularly the larger ones like Germany and France. The slowdown in China didn’t help, neither did the trade war.
What are you expecting from FAANGs over the next few years?
Background: FAANG is an acronym for the market's 5 most popular and best-performing tech stocks - namely Facebook, Apple, Amazon, Netflix and Google (Alphabet). Despite a brutal stretch in late 2018, these growth stocks have been big stock market winners in the last several years.
Answered by: Brian Byrne, a Futurist and the President of Aviador and Associates
The metric that's the most important to are monthly active users and daily active users. They need to keep those growing and they are starting to reach limits, it's called market saturation.
Apple yesterday reported some fairly difficult results and it's because most of the people that want an iPhone, have it. So they've pivoted to other things like services, content and so on. That can be a good bridge for a short period of time, but the FAANGs need to transform themselves, they need to compete more and more within the group.
Look at their Chinese twins as I call them - Baidu, Alibaba, Tencent and Didi Chuxing, and think about how they close their geographic gaps in China. All of them have problems because China basically booted them out. Google, for example, would love to be in with Baidu and have a shared business model in China.
That's kind of the next step for them if they want to be truly global and close all the gaps and keep growing. Growth is paramount.
I'll use the example of Amazon because Jeff Bezos came out of Wall Street, he was with D. E. Shaw, hedge fund of Wall Street and he knows a lot about financial services. Recently, he has been talking more and more about cryptocurrencies. So, I could see a payment system like Amazon Coin. I could see them learning from Ant Financial in China and maybe teaming up and doing something around the cashless platform. I could see asset management and banking, the likes sort of Revolut. What if Amazon said, OK, we're going to buy Revolut the way that we bought Whole Foods or Twitch? All of a sudden bang they'd be in financial services.
When will the next U.S. recession hit?
Background: As 2018 ended and 2019 begun, central banks across the world, particularly the U.S. Federal Reserve, changed their tone and became much more dovish. The Fed’s messaging went from calling for gradual rate increases to adjustments, suggesting their next move could, in fact, be a cut. With the U.S. Treasury yield curve then inverting in early April – generally a pre-cursor to a recession – the market started worrying about the possibility of the US economy rolling over soon.
Answered by: Richard Woolnough, M&G Prudential
Investors are worried when the next recession will hit, because when a recession happens, interest rates generally get cut. Hence bond funds should have lots of “duration”, or longer-dated bonds. It also gives an indication of credit risk, as companies, even good ones, tend to default when its economy is weak. When it’s hot, most companies, even bad ones, tend to survive.
The Conference Board U.S. leading Index, which measures 10 key components of the U.S. economy, is still in positive territory, for instance. At the moment, it is suggesting the next recession is roughly three years away.
Further, the U.S. jobs market is still extremely tight, with initial jobless claims the lowest for 50 years. Initial jobless claims – people deciding they want to move on from their jobs as a percentage of the total population – is the lowest it’s been for 40 years. This is a tight labour market. You don’t get recessions when you have tight labour markets. Wages between 3-4%. It’s hard to see deflation in a world where that’s happening.
Yet at the start of this year everybody was saying there’s going to be a recession in 2020 – 80% of portfolio managers thought there was a recession around the corner.
If there’s a recession around the corner, then you want to have lots of duration and no credit risk.
If you don’t think there’s a recession around the corner, you want to have lots of credit risk and no duration.
For my funds, that’s the view – I don’t think a recession’s around the corner. So, when the world in November/December last year thought a recession was happening, I looked as though I did not know what I was doing; suddenly the world decides there isn’t a recession and it looks like I do know what I’m doing because I have a good three months.
The market thinks the U.S. is about to stop; I don’t. I think the U.S. economy is fine, I think the Fed’s behind the curve – I think interest rates will continue going up; they won’t be going down.
The links to all of the above can be accessed here: What the experts say at the Morningstar Investment Conference, London.
