Alarm bells ring | Looking for alpha


Aggressive monetary easing can stop the global economic slowdown while increasing the value of financial assets, but we really need widespread structural financial and regulatory reforms, as well as trade agreements, to significantly boost global growth. We were not surprised to see that last week the OECD reduced its growth forecast for 2019 and 2020 to 3.3% and 3.4%, respectively, with most cuts taking place in the euro area. Inflation forecasts have also been lowered.

We have not changed our view since January that global growth is expected to slow down in the middle of the year and start to accelerate as we move forward into 2020. The main reasons for our optimism are:

  • All monetary organizations have now adopted more accommodative positions than we had anticipated.
  • Governments are increasing spending while cutting taxes, allowing budget deficits to widen.
  • Trade agreements will be finalized and / or the added customs duties will be put on hold.

Let's look at what's happening in the key economic sectors that justify our opinion:

  • The United States has become the pivotal country influencing our vision. There is no doubt that the Fed will at least pause the rate of price increases for the whole of this year and will probably end up liquidating its balance sheet in a month or two. We do not know if the Fed will cut rates to stop the dollar, but it would be good if it were done. The main goal of the Fed is now to protect the expansion rather than contain inflation. Several economic figures reported last week are worth mentioning. The increase in the trade deficit in December, at $ 59.8 billion and $ 621 billion for the year, was largely related to our domestic economic strength, our weakness abroad and the fear of new ones. tariffs in January 2019. It is not surprising that the trade war increased the deficit last year. The employment figures released on Friday were shocking for everyone, including us. Without going into details, we are convinced that the numbers were wrong. We are focusing instead on the number of ADPs that, according to reports released on Wednesday, indicated an increase of 183,000 jobs in February, weekly jobless claims that remain close to their lowest levels and openings for senior positions to 7.3 million. We consider that the December work report is an exception to reality and is totally rejected. It is clear that first-quarter GNP will be the lowest point in the US economy in 2019. Interest-sensitive sectors, such as housing, are already showing improvement with the recent decline in mortgage rates. There is no doubt in our minds that consumer spending will remain strong (just look at Costco (NASDAQ: COST), Target (NYSE: TGT) and Walmart (NYSE: WMT)), as well as capital expenditures. dedicated to productivity technology. Finally, there are new prospects for trade agreements with China, Japan and, hopefully, with the euro area this year. 2020 could surprise on the rise. Do not forget that Trump will do everything in its power to stimulate the economy and the financial markets before the 2020 presidential election. And Democrats run a huge risk by going too far to the left, in our opinion. The US stock market remains undervalued today, as we expect S & P's earnings to increase by at least 5% in 2019, with 10-year cash remaining below 3.0%.
  • The National Conference of China last week was very revealing, although it does not surprise us. China has reduced its economic growth target for the year to between 6% and 6.5% as expected. Prime Minister Li Keqiang proposed boosting the national economy through a combination of tax cuts and major spending plans. Trade was a major topic of discussion because it was clear that trade disputes had seriously harmed the Chinese economy. Ironically, last week it was reported that Chinese exports fell nearly 20% in February from the previous year, with a 26% drop in exports to the United States. We take these numbers with a grain of salt as well, with exports having been exceptionally high in November and December, anticipating tariffs added in January. Low imports have been affected for the same reasons and do not reflect the weakening of domestic demand in China. We are also confident that the Chinese economy will improve over the course of the year, taking advantage of the massive flood of additional cash and tax cuts, particularly from the past year. a drastic reduction in VAT. What if a trade agreement were reached with the United States, as we expect? It is important to note that the Chinese government is trying to contain speculation on its financial markets by allowing a sales recommendation on Friday on one of its largest insurance companies.
  • The Japanese economy rebounded 1.9% in the fourth quarter, after falling 2.4% in the third quarter. Private consumption rose only 0.4%, with wage growth remaining weak and net exports penalizing growth by 0.3%. The Japanese cabinet recently announced that its latest set of trading conditions fell for the third consecutive month, reaching its lowest level since June 2013. Japan desperately needs global trade conflicts to end. The BoJ can not do more than it already does, and it is equally difficult for the government to increase its deficit with these high levels. The Japanese economy will fend for itself with the improvement of world trade. We hope that Japan will conclude a trade agreement with the United States before the end of the summer, which will improve the prospects of accelerating growth later in the year, especially if China and the United States also reaches an agreement.
  • We remain negative about the outlook for the eurozone despite the ECB's policy change last week. The ECB has promised to keep interest rates at current levels until the end of the year and will offer banks a new round of unobserved loans since 2016. We do not think that the zone Euro can grow by 1.1% in 2019 as long as the region can not act together. . Brexit, the political problems in Italy and Spain, and especially its commercial conflict with the United States are holding back all the prospects of Europe. Germany needs to show moderation vis-à-vis its neighbors by allowing increased spending and lower taxes, even if this translates into higher deficits. It is not surprising that the region is in dire need of structural reforms to be more competitive globally. Nevertheless, we believe that all European governments recognize downside risks, including growing deflationary pressures, and will work together to promote growth, including a trade deal with the United States.

The aggressive monetary easing has eliminated the risk of a short-term recession, but it will not lead to faster economic growth before the conclusion of trade agreements. Businesses keep their hands in their pockets until they have certainty about trade policy. We are confident that trade agreements will result in more capital and hiring expenditures. China, Europe and Japan suffer much more than the United States from trade problems and therefore have much more to gain once agreements have been reached.

We have been writing since last October that the downside risks were unfathomable and it was time for the government to do the right thing. Trump disrupted the status quo in many ways. Although we do not agree with many things about him, including his manners, we share many of his goals. Who can oppose the absence of tariffs, subsidies, stolen intellectual property rights and a level playing field? Who can argue that the United States pays for all drug-related research costs?

Change is difficult and hiccups occur along the way, but the end of the game may be worth it. Alarms around the world are increasing the likelihood that trade deals will be concluded this year, which will lead to an acceleration of global growth by 2020. It is important to note that no one believes it, so we will not pay for it neither. . We believe that US markets are undervalued today, even without a trade agreement. We are less optimistic about other markets unless trade agreements are concluded.

Our portfolios are more diverse than we can remember without a single theme. Each investment is led by excellent management with long-term winning strategies and the resources needed to achieve it. While we continue to hear about excessive leverage in the system, this is really not the case for US companies whose balance sheets have never been so good. We are concerned, however, about the accumulation of public debt around the world.

We own many pharmaceutical companies that take advantage of new product streams, higher margins and cash flow. industrial goods and equipment companies with volume growth of 1.5 to 2 times GNP, rising margins and a huge generation of free cash flow; technology, including semi-products at a fair price for growth, generating huge free cash flow; cable companies with content such as Comcast (NASDAQ: CMCSA) and Disney (NYSE: DIS); housing-related businesses rely on HD that will benefit from insufficient supply and low mortgage rates; low-cost industrial commodity companies generating huge free cash flow; and many, many special situations where internal development will reduce the gap between the current price and the intrinsic value. We do not hold any bonds as we expect the yield curve to stiffen later in the year and stabilize the dollar as we anticipate its strength in the near term.

Review all the facts. pause, think and consider changes in state of mind; examine your asset allocation with risk controls all the time; do independent research and … invest accordingly!

Editor's note: The summary bullets for this article were chosen by the publishers of Seeking Alpha.

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