(Aug 12): Stock markets around the world tumbled last week and volatility spiked sharply higher (see Chart 1). The main instigator behind this latest bout of volatility is — yes, you guessed it — US President Donald Trump.
Trump took markets by surprise, tweeting a 10% hike on the remaining US$300 billion ($415 billion) worth of Chinese imports that are still currently free from taxes, effective Sept 1. This comes right after a high-level trade meeting ended in Shanghai. Talks were supposed to continue in the US in September, but Trump was upset that China did not sign off on a concrete deal to buy US farm products.
China retaliated swiftly, not only halting all state purchases of US agricultural products but also, critically, allowing the renminbi to fall below the psychological threshold of seven to the US dollar. A weaker renminbi will partially offset the impact of import tariffs by making products cheaper in US dollar terms and thus more competitive.
This then triggered a prompt reaction from the US, which labelled China a currency manipulator. These latest developments represent a significant escalation in the trade war between the two countries that has been simmering for well over a year and seem to push a deal farther beyond reach.
Few would hazard guesses as to what will happen next. But as we have come to accept, the most predictable aspect of Trump is his unpredictability and tweets that, more often than not, seem irrational to most of us. I would not be at all surprised if his next tweet sends stocks spiralling higher once again.
My advice to investors is, do not -panic. I am not making any change to my current strategy, which is to stay invested in US stocks. In fact, I believe this is the time to accumulate stocks that you have been wanting to buy but have not, owing to valuation concerns.
There is no doubt the latest salvo will further disrupt the global supply chain, hurt trade and affect global growth negatively. We must be cognisant of this elevated risk.
That said, I believe asset prices will not be eroded. The global response to slowing economic growth has been, and continues to be, more accommodative monetary policy. Case in point: We are already seeing rising bets that the US Federal Reserve will follow through July’s 25 basis-point cut with another reduction in September. Interest rates and yields will fall.
The value of an asset is equal to its discounted future cash flows, that is, V=E/r. Hence, even if expectations of cash flows (E) fall, asset valuations (V) will rise or stay the same if the discount rate (r) falls by the same or greater magnitude.
Bond prices rallied last week, sending yields to lower lows. According to Bloom-berg, the pile of negative-yielding debt has grown further to US$15 trillion, comprising some 44% of all developed-market sovereign debt, excluding that of the US. US Treasury bond yields, though also falling, are still giving positive returns. Hence, we are quite likely to see more fund inflows into the US market, which will be supportive of the greenback.
Furthermore, the world’s largest economy remains robust compared with the rest of the developed world. Consumer spending is healthy and unemployment is at a five-decade low. I remain sanguine on the composition of my Global Portfolio, which is heavily biased towards US consumer-related stocks.
The one exception could be Apple. The company reported better-than-expected earnings for 2Q2019 and its share price rallied sharply higher immediately after. It is fundamentally sound, sitting on a huge cash pile and shifting towards a more sustainable, subscription-based business model.
However, the company is also one of the most exposed to the US-China trade conflict. That said, I suspect downside to its share price will be limited by the fact that it is a heavyweight component in key indices, including the Dow Jones Industrial Average and Standard & Poor’s 500, which means it is widely held by index-tracking exchange-traded funds.
Fears that China is weaponising its currency by allowing the renminbi to depreciate — driven lower by market expectations of a worsening trade war — triggered worries of a wider global currency war.
But if we are honest, the ultra-easy monetary policies embraced by the European Central Bank and Bank of Japan — and before this, by the Fed — have also effectively weakened their currencies, whether or not that was the primary objective.
China has taken great pains to support the renminbi since its last significant devaluation move in 2015. Subsequently, it was forced to spend hundreds of billions of reserves to stem unintended capital outflows. Robust measures have since been implemented to give the government tighter control over capital flows and greater confidence this time around.
In addition to enhancing export competitiveness, weakening the currency could discourage imports by raising prices in renminbi terms. It would help foster demand for domestically produced goods and services through import substitution and, therefore, growth of local businesses.
This would be in line with China’s transformation of the economy from export-driven to consumer-led growth. Underscoring the country’s diminishing reliance on trade, net exports as a percentage of GDP have fallen steadily in the past decade (see Chart 2).
The perception that emerging markets are riskier means that they will always suffer the brunt of any flight-to-safety selloff. We could see more volatility in the renminbi in the short term. This is the main reason I decided to lock in profits on Ausnutria Dairy to take a slightly more defensive position.
The company has done exceptionally well earnings-wise, but has come under selling pressure in recent days, owing to the rising external uncertainties. The disposal raised cash holdings to just over 20% of total portfolio value.
My Global Portfolio fell 3.2% for the week ended Aug 7, slightly better than the 3.6% decline for the MSCI World Net Return Index. Unsurprisingly, the worst performers were those with Chinese connections: Apple and Alibaba Group Holding.
The Walt Disney Co’s latest results fell short of market expectations, dragged down by integration costs for the 21st Century Fox acquisition as well as losses related to its streaming services, Hulu and Disney+. The latter is slated to launch in November. On the other hand, shares in Builders FirstSource surged 10.5% after it handily beat expectations for 2Q2019 earnings.
Total portfolio returns now stand at 6.4% since inception. This portfolio continues to outperform the benchmark index, which is up 3.5% over the same period.
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports
