In February, the senior advisers within Varria were invited to attend the Portfolio Construction Forum in Sydney. This is a three day event that centres around sharing ideas and opinions from economists, portfolio managers, analysts and academics on the future economic and market outlook and the factors that will drive them, in particular investor behaviour. This was a great experience for us to hear a wide range of views on economics and investing and also to give us the opportunity to meet privately with a number of overseas portfolio managers who had travelled for the conference.
Some key takeaways were as follows
- The interest rate policy of the US Federal Reserve. Much of the blame for the sharemarket correction in late 2018 can be levelled at the Fed’s movement from loose monetary policy to a tougher stance on raising interest rates. Similarly, we have seen markets rebound as the Fed has now become more dovish in it’s attitude and schedule for rate rises. This has calmed markets now factoring a pause in rates for the rest of 2019. However if the US labour market continues to be robust (they are experiencing the lowest unemployment in 60 years), we may see the spectre of inflation again leading to another turnaround. On this basis we are watching US growth closely.
- US trade war with China. Trump’s hard stance on Chinese incursions on intellectual property rights and technology has been welcomed domestically however the world remains very cautious about the implications of a trade war. Many commentators believe we will see a continuation of the current truce until the Trump presidency is over in either 2 or 6 years. The Chinese timeline is far longer that the US’s especially with Xi Jinping’s set to dispense with the current two term limit on the presidency.
- Emerging markets growth. Interestingly as costs rise in China, are seeing manufacturing moving to Mexico which has the advantage of 20-40% cheaper labour, US-style quality control standards and is heavily integrated into the US supply chain. Trump’s wall has left many feeling bearish on Mexico however investors are realising this in not an impediment to economic growth. This situation is mirrored in a number of other emerging markets and this may become an investment theme in the year ahead
- US recession still looming but not in the short term. Most forecasters have been touting a slowdown in the US at some point in the future, as a natural part of the economic cycle given the large scale growth seen over recent years. More bearish commentators were putting this at end of 2019, however the consensus now seems to be pushing this beyond 2020 and even 2021. With rate tightening cycle slowing, falls in the oil price and corporate cash flow stable, the US economy is still expanding. Accordingly our portfolios are still remaining focused on US equity markets as we aim to surf the end of the bull market.
The Portfolio Construction Forum is one of the many activities that happen behind the scenes and in between client reviews with Varria. We aim to be as well informed as possible on current trends in markets and investment theory to provide the best possible investment solutions for our clients.