Asset Class: International Equities

A slight recovery in a very different market environment

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Was that it? Is the “correction” now over and are we back to the races? The U.S. Federal Reserve which helped propel the market downturn with “quantitative tightening” (QT) appears to be backing off and Wall Street has picked up the scent and run with it. And then in time-honored fashion the rest of the world markets slavishly followed along. Most have now recovered the losses of recent months. Wall Street is back to where it was last November. Why were we concerned?

But has anything fundamental changed? Well, if QT has genuinely been suspended it will obviously prevent the constant liquidity drain which is never good news for stocks. But unless the other Q (QE) restarts we still remain in a very different environment than previously as the steady flood of new money which juiced global markets from 2009 has ceased (except in Japan). The legacy of the “juicing” is a level of indebtedness relative to output that exceeds anything that has gone before. And in the meantime the world economy continues to grow ever more slowly.

Myanmar: Don’t be deterred by the “scare” headlines

Your correspondent is penning this note from Myanmar (formerly Burma) near the end of a three week canter around the country. This is the second visit – the previous one being almost four years ago – and it is interesting to note the changes, or lack of them, that are reshaping this recently democratized country (2011). Of course Myanmar keeps hitting the headlines for all the wrong reasons – notably the human rights abuses along the border with Bangladesh in the North-West of the country. This is an extremely complex issue that the powerful foreign press twists in all directions and we know enough to know that it is not a subject on which we are qualified to comment.

Many expected the election of Aung San Suu Kyi’s party in 2015 to be the beginning of the end of the ethnic clashes but sadly that has not been the case. The military retain a 25% bloc in Parliament and, reading between the lines, it seems that is the main obstacle to substantial progress on a number of fronts. There is a push to change the constitution removing the 25% bloc but it requires a parliamentary majority of 75% plus one. That makes it sound an impossible task but optimistic noises are being made about moderation among some of the Generals which may permit the change. Aung San Suu Kyi (or, “The Lady” as most locals refer to her) remains extremely popular. The next election is in 2020.

The economy is growing rapidly – among the fastest growing in SE Asia – but it is coming from the lowest base. Military rule from 1962 left Myanmar the poorest in the region with obsolete infrastructure. It is still common, for example, to see plowing of the fields carried out with a bullock team. Roads are often being resurfaced by hand as there is an absence of machinery. But that gifts Myanmar with a once in a lifetime opportunity for significant productivity growth. China is an example of a country that has leaped decades of technological development in quick time and given sufficient capital investment with government encouragement Myanmar has the potential to do something similar.

The road network remains in terrible condition, but marginally less terrible than four years ago and most road transport is by motor bike. It leads to some “exciting” scenarios. Motor bike helmets now seem to be more common but it is still not unusual to see a motor bike loaded with an impossible number of passengers or astonishing loads of “stuff”. Many trucks, particularly in the rural areas, are powered by an extraordinarily basic exposed motor that requires a crank to start, emits great clouds of fumes, is incredibly noisy and appears unable to propel the vehicle at more than a slow trotting pace. Often it is festooned with passengers – including roof-riders. Health and safety – what’s that? One notable improvement is that traffic lights now seem to have some meaning although the same cannot be said of pedestrian crossings.

The railways are ancient and not improved in decades. It is recommended that foreign visitors not drink the water, the power grid is unreliable and mains sewerage remains a distant hope for much of the country.

Now all of this may sound like an advertisement for all the reasons not to visit Myanmar but don’t be misled. It is a delightful place. The citizens are happy and extremely welcoming and the popular tourist sites are truly remarkable – Bagan and Inle Lake being two examples. The Irrawaddy still carries vast amounts of produce and is one of the world’s great rivers.

The wider world is now visible to the residents. Despite the extreme poverty, mobile phones and satellite dishes are everywhere. The internet speed in most places seems to be pretty good but its availability and reliability is in need of improvement. English language appears on signage throughout the country and some splendid hotels have opened and more are planned. The level of service would shame many western establishments.

Importantly, since the election of the new government, schooling has been made compulsory. Adequate education is always the key to unlocking a country’s potential. The workforce has embraced their relatively recent freedom and flexibility with alacrity. They are hard workers and natural traders and given half a chance will help Myanmar climb out of the poverty trap. It is unfortunate that the regular headlines relating to the ethnic issues have deterred many tourists as the impression given is that the country is unsafe. Far from the case. Some very small areas are not recommended for tourists but the bulk of the country is perfectly safe for western travelers. It is very easy to have a thoroughly enjoyable and fascinating time in Myanmar. It has a rich history that rewards discovery. Don’t be deterred by the “scare” headlines.

Italy: A classic debt trap?

Moving the focus to Europe we find Italy continuing to flail about endeavoring to find a solution to its debt and growth (lack of) problems. One of the most recent plans is to sell as much as 1.8 billion euros of state-owned real estate. When in trouble sell the assets – a much used ploy in global politics. Italy’s public debt amounted to around 133% of GDP at the end of last year. Recent IMF projections have it steadily rising to around 165% of GDP by the end of the 2020s – based upon current government policies. The IMF expects real GDP growth to remain below 1% each year through to 2023. At this rate Italy will never climb of its deepening debt hole.

In 2018 Italy’s gross financing need (government deficit and maturing debt relative to GDP) amounted to 22.2%. In the advanced world this was second only to Japan (40.8%) and the U.S. (23.3%). (Source: IMF). The house of cards depends on confidence. Confidence remains, so far, in the U.S. and Japan but is quickly evaporating in Italy.

Disquiet among the voting public in Italy is unsurprising when a comparison is made with the other “big three” in the eurozone – Germany, France and Spain. IMF calculations reveal that since 2000 real GDP per capita in Italy has fallen by around 4% whereas in Germany it is up around 23%, Spain 15% and France 12%. It cannot be said that the improvements in Germany, Spain and France are particularly impressive but it can be said that the Italian record is spectacularly poor. The IMF notes that emigration of Italian citizens is near a five decade high. No surprise there.

Italy is in a classic debt trap. As we have previously remarked we see little prospect of sustained recovery whilst it remains within the eurozone.

Speaking of debt we picked up an item from various news services that a state-backed borrower in China failed to make good on an interest payment on a U.S. dollar bond on February 22. Qinghai Provincial Investment Group Co., an aluminium producer has now technically defaulted on a U.S. $300m bond which matures in 2020. The company is more than two-thirds owned by the provincial government. The significance lies not in the amount of the default, which is relatively trivial in the China context, but in the fact that the provincial government allowed it to happen. This throws into question the vast amount of shaky debt taken on by many provincial governments in the wake of the global financial crisis. The comfortable assumption that the Chinese authorities would provide a backstop is no longer quite so comfortable.

Market returns for February

Turning to the markets and utilizing MSCI local currency price index performance for developed markets for the month of February we saw the following returns: U.S. up 3.1%; Canada 2.9%; France 4.9%; Germany 2.4%; Ireland 6.6%; Italy 4.2%; Netherlands 5.3%; Norway 3.5%; Spain 2.8%; Sweden 3.7%; Switzerland 4.6%; UK 1.5%; Australia 5.0%; Hong Kong 5.9%; New Zealand 5.9% and Singapore 0.3%.

All pretty impressive stuff. Since the beginning of the year many markets are now up by more than 10%. The U.S., for example, has delivered appreciation of 11.4%.

The interesting feature of the performance data is that many developed stock markets are still down if measured over 12 months. Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Portugal, Spain, UK, Japan and Singapore all fit into that category. Even the U.S. has only managed to eke out a marginally positive return over a year (2.8%). The gold medal for a 12 month return goes to New Zealand with an impressive 13.0%.

Benchmark 10-year government bond markets saw little change in yields over the month. The U.S. bond continues to trade around 2.7%, Canada around 1.9%, Germany 0.18%, UK 1.3% (a marginal increase) whilst Japan rewards 10-year investors with a negative yield of 0.02%. (Source: Bloomberg). None of these yields suggest robust economic growth ahead. None of them provide an adequate return. All of them indicate an investment world still suffering a hangover from extraordinary central bank intervention. Normality remains some distance away.

You may have noticed that we have managed to complete a monthly commentary without mentioning B****t or D****d T***p. We doubt we will be as successful next month.

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