Markets Q1/2017 Journeyman’s Progress Favors Value, Selectivity and Political Caveat Emptor

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This article was last updated on April 16, 2022

We see currencies and precious metals as reverting to being harbingers of stress. Political caveat emptor is required as rhetoric appears on abrogating agreements and even treaties. Yet, the era ended over a half century ago of treating Latin America as banana republics, of foreign gunboats rampaging up the Yangtze river in China and for that matter globally, arbitrary edicts from colonial administrators. Further, traumatized refugees add not detract to host economies as seen in the 1970s from Uganda, in the 1990s from Vietnam and that refugees fleeing pre and post war Germany hurt it and helped the United States from entertainment to health to high technology to manufacturing.

The U.S. administration was elected on a populist message. The run up is similar ahead of several European elections that are due in 2017, including in France and Germany. Asia has its share of such activity. Via trade to monetary affairs societies were changed worldwide by a series of Great Generation politicians (stimulated by President Roosevelt and then Chancellor Adenauer) as well as by central bankers inspired by Lord Keynes. Some four decades later, so did leaders like President Reagan as well as Chairman Deng and Federal Reserve Chairman Volker. In between, no less a genuine statesman and war hero than President Eisenhower warned about military/industrial complex risks. Geopolitics remain volatile, stretching from the Korean peninsula to Eastern Europe. Present politics and policy appear to us as being one of a journeyman’s progress, quantitative ease notwithstanding. In times of slow growth, looms a slippery slope towards protectionism and retaliation.

Now, markets need growth for stable investment, not added complacency from quantitative ease. Global growth expectations have moderately increased, for instance towards 3 ½% for annual GDP by the IMF. Likely to be a key aspect for the markets over time is consistency of standards versus momentum. Across asset classes, it would favor value and selection tilts over the close correlations and momentum that characterized the 2009-16 capital market space. We discern definitive change in the ability of central banks to influence events or even in reacting to them. We favor focus on quality across asset classes.

We see fixed income as having the greater risks and are underweight but within it favor short to medium term securities, especially in U.S. dollars. In equities, anticipating lower than consensus earnings, even if expanding, we see leadership from the early and still restructuring Financials as crucial. In growth, we favor substance driven Information Technology over concept driven social media and over increasingly M&A driven Healthcare. In cyclicals, we see advantages in Industrials over Consumer segments. Consumer defensive areas already have elevated valuations while worldwide, discretionary areas appear pushed against changed consumer tastes. On restructuring evolving into delivery, we favor Materials and Energy. Geographically, we overweight the U.S. for delivery and change. We also overweight Asia for growth and less vulnerability than many assume, even were the winds to change about freer trade.

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