Investing in a VUCA Global Environment

We commented last week that we still prefer investing in the United States despite acknowledging that there was more potential upside abroad as global growth accelerated in 2020. Our decision, which many disagreed with, was based on one of our core beliefs which is that we live in an VUCA (volatile, uncertain, complex, and ambiguous) global environment where risks overseas are far greater than here.  Friday’s killing of Iran’s General Qassem Soleimani, the architect of numerous strikes/kills against the U.S and our allies for over a decade, has resulted in an escalation in global geopolitical tensions and economic risks; higher energy prices near term but not longer term; and a decline in stock prices while pushing bond yields lower (flight to safety). Did you notice how the pundits/experts were all negative Friday night after having been so positive just the day before? They need to look over the valley to be a successful investor.

 

We are maintaining our positive outlook for stocks markets in 2020 as we still see an acceleration in global growth supported by significant easy monetary conditions everywhere; increased fiscal stimulus in major industrialized countries; and reduced trade tensions leading to improved global trade. In fact, increased geopolitical risk is just another reason why monetary conditions will remain unusually supportive for now. Let it Rip!

 

We are not minimizing the possible impact of killing Iran’s second in command.  Virtually all of our global allies acknowledged this man’s role planning/supporting terrorist actions killing thousands for the last 15+ years.  Wasn’t Trump’s action appropriate for the crimes committed?  It should have happened sooner in our opinion as many lives could have been saved. But, past administrations, here and abroad, were more concerned about their pocketbooks than protecting their people. How about Biden’s comment? He acknowledged that this man deserved his fate but preferred if Trump let the heads of Congress and foreign leaders know before he acted. Really? This was a surprise attack!  It is time for all nations, especially our closest allies in Europe and the Middle East, to come together fighting terrorism.  Why isn’t Macron fully supporting Trump’s actions as France has been major targets of terrorism over the last few years? The simple truth is that we live in a VUCA world and must try to eradicate terrorism wherever it may be. Trump’s red line was violated as he warned Iran through diplomatic circles that no Americans can be killed. Unfortunately, a U.S contractor was killed last week when Iran attacked an Iraqi base housing U.S soldiers and civilian workers.

 

Clearly there are heightened concerns about reprisals from Iran against U.S bases, oil production and civilians/politicians in the Middle East and elsewhere. Do you really think Iran’s army would have a chance against the U.S in a full-scale confrontation?  It is clear that the killed Iranian commander orchestrated the attack against Saudi oil fields last year, too. Fortunately for the U.S, we are energy independent; we are the swing producer in the world rather than OPEC; and we are now a net exporter of energy products. Clearly Europe, China, Japan and the Emerging economies are at greatest risk for any supply disruption which we are not forecasting at this time as evidenced by longer-term energy contracts being flat to down Friday. U.S energy independence is just another reason why we prefer investing in the U.S. and companies should really consider building plants here rather than abroad.

 

While not minimizing the importance of geopolitical risks when investing, it is clear that economic, financial, monetary, trade and regulatory policies are far more impactful when investing longer term. China is in an awkward position today as its government will support Iran but, on the other hand, it can’t afford an escalation in the conflict jeopardizing its needed oil supplies from Iran. Russia, too, is in an interesting spot as it wants to strengthen its ties not only with Iran but also with Trump. We are always investing in a world with geopolitical risks like with Russia, China and North Korea, Iran, Iraq and Turkey. It’s time for the world to coalesce against terrorism.

 

It’s time to look at the most recent data points and changes made in monetary, fiscal, and trade policies that support /detract from our view that global growth will accelerate in 2020:

 

United States. Clearly the United States economy closed the year on a strong note in 2019 and could do even better in 2020 supported by the Fed, fiscal stimulus and trade deals with China, Japan, Canada and Mexico. Trump’s push for energy independence in a VUCA world could benefit the U.S competitively for years to come. The Fed notes which came out Friday supported our belief that the Fed will not raise rates in 2020 and possibly longer until inflation sustains itself above 2% which we do not anticipate for years to come due to  global competition; major technological advancements leading to significant productivity gains putting a lid on unit labor costs; disruptors popping up everywhere; and easier regulatory restrictions. We expect S & P profits to increase to an annualized rate well above $170/share by year end 2020. And we expect the yield curve to steepen with the 10-year treasury rising to a 2.5% yield and the 30-year treasury yielding near 3.50% by the end of 2020. We are staying the course looking for a market exceeding $3400 easily this year. Trump will do everything in his power as standing President to boost our economy and stock market going into election in November. We expect him to win or a moderate Democrat like Biden.

 

China. Since Phase 1 of a trade deal has been finalized, the government has moved to stimulate its economy big time by announcing additional major fiscal stimulus and a cut in the reserve ratio by 50 basis points, so banks reduce their lending rates and provide much more capital into the system. It is clear to us that China’s economy bottomed out in December and 2020 growth could surprise on the upside.

 

Eurozone and Britain. We maintain a cautious view towards the Eurozone and Britain in 2020 and beyond despite the fact that we expect some improvement in global trade and a Brexit deal to be agreed this year. Monetary policy will remain overly stimulative but cannot do it alone. Europe as well as Britain need fiscal stimulation, a trade deal with the U.S and regulatory reforms before it can really sustain positive growth over time once again. Time for new leadership in Germany.

 

Japan. We expect Japan’s economy to do better in 2020 bolstered by aggressive monetary ease, fiscal stimulus exceeding $120 billion and increased trade as global trading tensions ease.

 

Investment Conclusions

 

While we fully recognize the ratcheting up in geopolitical tensions Friday, we really have not altered our overall views. It is clear that the global economy will accelerate as we move through 2020 bolstered by significant monetary ease everywhere; trade deals supporting increased global trade;  big time fiscal stimulus in the key industrialized economies; a Brexit deal; improved business and consumer sentiment as uncertainty fears ease; higher capital spending and finally Trump’s desire to get reelected next November. Trump believes that he needs a better economy and higher stock prices than now to win.

 

Two other key points to make: governments, corporations and individuals continue to refinance their balance sheets at record paces taking full advantage of these exceptionally low interest rates which is a short and long term positive; and individuals continued to over invest in bonds/short term money funds in 2019 by the tune of over $757 billion while reducing their equity investments by $181 billion in 2019 exceeding the record outflow of $112 billion in 2016.  Draw your own conclusions by these numbers but remember that we expect a steepening yield curve in 2020 along with stronger economy and rising earnings.

 

Our portfolio composition has really not changed for several weeks as we continue to significantly outperform all indices. We are concentrated in technology, especially semis: global industrials, machinery and capital goods companies; financials; low cost, high cash flow industrial commodity companies; some specialized retailing, healthcare, agriculture and many special situations.  We own no bonds and expect the dollar to weaken in 2020.

 

Our weekly Investment webinar will be held on Monday January 6th at 8:30 am EST. You can join the webinar by typing https://zoom.us/j/9179217852 into your browser.  Send us your questions in advance to Bill.ehrman@prosperitefund.com if you like.

 

Remember to review all the facts; pause, reflect and consider mindset shifts; turn off the pundits/experts/ look at your asset mix along with risk controls; do independent research and … Invest Accordingly!

 

Bill Ehrman

Paix et Prospérité LLC

917-951-4139

Bill.ehrman@prosperitefund.com

 

 

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