Global Macro Review
As North Korean missiles flew over the Japanese island of Hokkaido in late August and then another one in mid-September, with sirens blaring and warning the Japanese people to hide in their basements, the markets were confronted with a potential global crisis. We can only imagine what was going through the Japanese people’s minds, perhaps fearing the nightmare of a nuclear attack on their soil again. Prime Minister Shinzo Abe capitalized on this fear with his strong stance against North Korea and his call for a snap election on October 22. Prior to North Korea’s threats, Abe’s standing in the polls was battered by scandal and his decision to call a snap election is aimed to take advantage of a recent uptick in ratings. A new twist is a new party, Party of Hope, created by the Governor of Tokyo Yuriko Koike, a former cabinet minister in Abe’s government until she resigned to run for Tokyo’s governorship. Koike may not actually run in the campaign, but her party and her platform of “Yurinomics” are considered a real challenge to Abe and his Liberal Democratic party. That said, there are more similarities than differences between these parties given their conservative stance and if Abe does win a strong mandate, he will undoubtedly bring up Japan’s postwar pacifism for discussion.

The European election cycle is turning out to be more of a feel-good story rather than being tension-filled as originally anticipated. With the Dutch and French elections behind us and the populist parties being defeated in both cases, the antagonists Geert Wilders and Marine Le Pen appear to have left the stage. We still have to wait until September for the German election to take place.

This year’s European election cycle reminds us of a tension filled three act play, with all the elements of edgy characters, criminal charges, voter insecurity, and the risk of disintegration of a political union. In this European play, the first act took place in The Netherlands. The leading character was Mark Rutte, the leader of the incumbent Liberal party (VVD) representing the old regime, who was astute enough to understand the discontent among the people. He won the Dutch election, thereby fending off the antagonist. In this case, the antagonist is Geert Wilders, a person with a checkered past including being found guilty of inciting discrimination against Dutch Moroccans back in 2014. Yet, his campaign platform continued to focus on an anti-immigration message. We consider Rutte’s win a large victory against populist rhetoric of anti-immigrant and anti-Islamic politics.

If you are a liberal in your political views, 2016 was definitely a discouraging year, highlighted by the Brexit vote and Trump’s victory, along with secondary events such as the loss by the Italian government in its referendum and the rise in popularity of the right wing National Front in France. The winning theme in 2016 seems to have been that globalization is a scam to benefit only corporations and the rich. Thus, with the rise in populist politics and resulting in potential protectionist policies, a key question we ask ourselves as global managers is whether globalization is dead.

We recently had the good fortune to attend a leadership lecture featuring Dominic Barton, the global managing director of McKinsey, a global consulting company. Barton, in his very Canadian self-deprecating manner, provided an interesting overview of how different countries can find stability and growth in an age of disruption. The overriding theme is that the next twenty years will be some of the most disruptive and exciting that we have seen, driven by four global forces: (1) shifting economic power to Asia, (2) accelerating technological change, (3) the aging population, and (4) system-wide transformation where the public’s perception is based on emotion rather than fact. We definitely witnessed this transformation with the Brexit vote and the recent rejection of ceasefire between the Columbian government and FARC.

The Brexit vote and its aftermath has dwarfed all other financial and political events during the past quarter. Immediately post the June 23rd vote, we shared with you our views on this event. After digesting the news for the past two weeks, our position has not changed much. Our overriding concern lies with the uncertainty this outcome has caused and the potential contagion to other markets globally. While we do not believe this will trigger a financial crisis in the order of magnitude of a Lehman failure, we do need to be cognizant of what appears to be a fundamental change in the environment.

If you went away at the beginning of the year and came back at the end of the quarter, you might think that not much took place over the last three months. Well, in a way, that is true. We ended the quarter about where we started, despite the wild rollercoaster ride in the interim, with main equity indices dropping to multi-year lows and then rebounding. The tumultuous first six weeks was caused by key macro concerns centered on China, oil uncertainty, geopolitical risks and skepticism around growth in general. Widening credit spreads in January, especially in the Energy sector added to the apprehension. 50% of distressed high yield debt is in this area! However, the WTI oil price moved back up to U$38 at quarter-end from the low of U$26 in mid-February, high yield spreads narrowed, and the China devaluation concerns also seemed to diminish. Global equities, which had formally entered a bear market in mid-February, quickly reversed into one of the best low quality trade rallies in recent memory.

The latest installment of Star Wars – The Force Awakens entertained millions with the good fighting off the evil Empire. It is unfortunate that the Force could not exist in the real world and fight off all that is evil. There were 6,692 migrant deaths in the Mediterranean Sea in 2015 with more than one million irregular migrants arriving from Syria, Africa, and South Asia. Both are appalling statistics. Along with these gruesome numbers, we may also associate last year with the disturbing and dramatic increase in the number of large scale attacks. We connect this with the unfortunate events of the two terrorist attacks that took place in Paris in January and November given the media attention alongside these particular events. But the reality is that there were 385 terrorist attacks globally last year, many of which received little attention from Western media. This made the year a gloomy one indeed and this sentiment was also reflected in the turbulent and challenging markets. Sadly, as the frequency of terror attacks increases, the market reaction continues to be relatively more muted.

Despite the market not being shaken radically from shots of terror, there is anxiety for various reasons, one of which is that we have yet to witness a robust recovery or a global expansion since the last recession. Another reason is the growth realignment in China resulting from weaker demand, which led to a downturn in commodity prices and prolonged manufacturing overcapacity. Hence, there have been global repercussions and global deflation potentially. The producer price index is at its lowest average point for six years in the ten largest economies in Asia excluding Japan. For example, China’s producer prices are down a cumulative 10.8% from their recent peak in 2011 and we can see the dramatic decline of various commodity prices in the chart below.

Global Equity and International Fund Strategies Third Quarter 2015 Review

Suspenseful drama with lots of twists and turns may be enjoyable to watch in a movie, but these are not the ingredients we want for equity markets. And we had our share of ups and downs this past quarter. Concerns of a
global slowdown continued to dominate global markets and recent data confirmed fears around emerging markets as China posted weak trade and Purchasing Managers’ Index (PMI) data while Brazil’s sovereign
debt was downgraded to junk. U.S. and European PMIs also slowed, all of which prompted the Fed to keep rates on hold. In short, investors remain concerned that global growth is faltering.

Global Equity and International Fund Strategies Second Quarter 2015 Review

Global Review

We spent the past quarter running hard but not going anywhere. The Central banks on a global scale continued to bring down interest rates in an effort to reflate their respective economies. Yet, the markets were consumed by headlines brought on by Greece and the drama associated with not paying their loans to the IMF on time.

Based on our recent meetings at a CEO conference in Europe and additional meetings with investee company management teams, our sense is that the European market is in launch mode but has not experienced take-off yet. Despite the market’s anticipation of the stimulative impact of the weaker Euro and lower oil prices, it will still take some time for European companies to fully realize the positive impact in their operations. However, the current environment is certainly better than it was a few years ago and Spain is cited as showing an improvement from its low base. The consensus remains that the U.S. is still the strongest and this bodes well for our European holdings as they are overweight in their U.S. exposure. Emerging markets remain subdued with Russia and Brazil considered to be in a recession and there is concern over China’s slowing growth rate.

…