Investec Head of Research
"Entrepreneurs are happily taking risks again, and I think they should carry on doing so provided there isn’t a dog-whistle moment that lifts all their heads from the pleasant task of making money."
In this video Investment Manager Alex Neilson talks to Investec Head of Research John Haynes about recent volatility in the market. John also discusses the potential impact of trade discussions between China and the US on the markets and explains what Investec are doing to mitigate risk within your portfolio.
Alex: Performance for Click & Invest has been ahead of the benchmark so far in 2018. However, the portfolios have still seen losses in the first quarter. We sat down with our head of research, John Haynes, to discuss the key factors impacting the markets.
So, John, throughout the first quarter we’ve seen real swings in the market. What do you think has been behind this?
John: I think it’s evident that investors are grappling with two factors. The first is a high-class problem. That is the fact that the world is enjoying synchronised global growth for the first time in a long time. But the downside to that is that global monetary policy will also change to recognise this fact.
So for a long period of time, we’ve had interest rates at very low levels, which has made it easy for people to borrow and invest. When that environment changes then perhaps it is less easy for people who invested and perhaps therefore it’s a less favourable investment climate in the near term. So that’s a big change for investors.
The second point that investors are having to deal with is Donald Trump taking on China on the world trade stage. That’s quite unwelcome because they are the two largest economies in the world and previously have had a cooperative trading relationship. The unpredictability of the outcome of a confrontation is something new and unpleasant.
Alex: So why do you think the market has reacted so negatively to Donald Trump’s trade policy?
John: Donald Trump’s trade policies initially were only locally based in the sense they were trying to reorganise the Latin American and North American trade pacts. China was always in the sights, but when China actually became the focus of his attention, everybody became concerned that the relationship between the two largest economies in the world was going to deteriorate, producing unpredictable outcomes.
China’s growth and China’s development from a relatively insignificant economy into the world’s second largest economy that I’ve just said, has been part of the motivating force that has created wealth in the post-millennial years, and if that is threatened by a dramatic change in the relationship with America, then that could have negative consequences for all of us.
Alex: John, do you think there’s a possibility of tensions between China and the U.S. having a real knock-on impact on investments?
John: Yes, I do think it’s more than just an impact on near-term sentiment. The reason for this is that the integration of China into the world economy, indeed China and the emerging economies has had a positive effect, not just upon growth but also upon keeping inflation in check.
Lower growth would be bad and higher inflation would also be bad because it means that the pound in your pocket is worth less. The combination of those two factors is not a good prospect for investors to have to consider.
Alex: So, is there a real imbalance between China and U.S. trade, or is it being exaggerated?
Respondent: Well there’s definitely a real imbalance. Donald Trump likes to talk about the three hundred and seventy-five billion dollars, and that isn’t a made up number, it’s a real number that the U.S. statistical offices have measured. It is however, only the trade balance rather than the balance in other service areas.
So, if you take into account the number of Chinese people who go to visit America, which they like to do a lot, that’s a lot more than American people visiting China, and the balance of monies that that accounts for reduces the trade balance deficit by quite a bit.
Having said that, there’s also another angle. Donald Trump is clearly trying to address a real issue, which is China’s attitude towards intellectual property. They’ve used every means at their disposal over the past 15 years to get hold of American technology, technology from everywhere in fact, to upscale and upgrade their own manufacturing capabilities.
That has perhaps certainly come close to the levels of tolerability, and Donald Trump is clearly trying to motivate all forces possible to make China behave better in terms of the protection of intellectual property rights, and that is something which plays well with Europeans as well as Americans. If you have a high intellectual property industry base, you want to protect that base.
There’s a final part of the equation which we have to be aware of, which is Donald Trump is facing mid-term elections at the end of this year. A policy of aggressively attacking a trade counterparty, that has been already identified as having trade practices which perhaps don’t match up to the standards one would like, that plays very well to his own electoral base, and will raise the possibility of him performing better in the mid-term elections in November.
Alex: So, in light of these trade discussions, what are the Investec research team doing to protect client portfolios?
John: I think there are two things to consider here. The first is that we are always braced to a certain extent for the unexpected. There is no view in our minds that the road from here to the future, it does not have bumps in it. And we have long been aware that Donald Trump and the world politically is not a stable place and we should understand that day-to-day things can change quite rapidly.
But things changing rapidly in perception is not the same as things changing materially in reality. And by that, I mean we have a strategy in place that we believe is a sensible one in terms of taking risk. We are resilient, we believe, to changes in the outlook. A material change in the growth picture is not something we are currently are expecting.
We think that the recent political issues between China and America will resolve themselves because it is in everybody’s best interests for that to be the case. So, our central case outlook is the same as it was as we came into this year, and we still believe that’s the right place to be.
Alex: So, John, what are the key influences that we are looking for over the next quarter?
John: I think a quarter’s a hard time because I’m never very good are predicting the future on a three-month basis, but I’m hoping that what we see is we get through this current patch of volatility without it becoming something that could damage confidence of businesses.
We have got to a point in the world where we have synchronised growth. That means entrepreneurs are happily taking risk again, and I think they should carry on doing so provided there isn’t a dog-whistle moment that lifts all their heads from the pleasant task of making money.
Donald Trump’s efforts at engaging China in a sit-down discussion about trade practices could do that, but I don’t think it’s really likely. And as we go through, I’ll be watching very closely not just volatility in stock markets, but volatility in foreign exchange markets and in interest rate markets, because those two components are more unsettling to real businessmen than stock market volatility.
Businessmen are very used to stocks going up and down. That’s part of daily life, it’s not unusual. But it is unusual for the terms of trade, the things they use on a daily basis, the price of money and the price that they exchange their profits in, for that to be moving around a lot, that could scare them and that would be an unpleasant development. So that’s one way of looking at the world.
However, I think ultimately that investors will become more comfortable with the situation. They will start to realise that Donald Trump is engaging China, not really trying to take them on. They will also, I believe, become more comfortable with the course of monetary policy going forward. Those two factors together should set us up for a decent finish to the year.
Alex: As you've heard from John, the outcomes of the U.S. and Chinese trade negotiations are obviously important for investment assets, but here at Click & Invest, our portfolios contain a wide range of investments to help mitigate volatility, and as always, we’ll be monitoring markets and keeping your portfolios updated with any changes we see fit.
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