This column is being published later than usual. So much was scheduled to happen over the last two weeks that we believed it would make far more sense to take the outcome of those events into account. These included the visit of China’s Vice Premier Liu to the US on 10 October, which led to a delay of the tariff increases expected on 15 October, and the UK Parliament’s vote on Brexit over the weekend, which sent Prime Minister Johnson back to Brussels to ask for a delay.
We conclude that, while we don’t have much more certainty than we had ten days ago on either trade or Brexit, we do have a better understanding of how far some of the parties involved are willing to go to get to a resolution.
For all of his tough talking about a no-deal Brexit, Boris Johnson has worked hard to solve the issue of the Irish border and put another deal on the table. Except for the border arrangement, the rest of the deal doesn’t seem to differ from what former Prime Minister May had proposed.
One would be forgiven for thinking that Mr. Johnson would rather not go down in history as the man who crashed the UK out of the European Union. Or maybe it is just the formidable pressure applied by the British Parliament that put a possible Brexit deal on life support. That said, the odds of a no-deal Brexit remain high, if not by end of October, then possibly by the end of January 2020.
President Trump, on the other hand, is in the midst of an impeachment process, facing backlash from his own party for withdrawing troops from Syria, and there are signs of a US economic slowdown. The latter is probably Mr. Trump’s biggest worry, as a negative impact on the US stock market’s performance could make some of his constituents turn away from him. He appears more keen than ever to show that he has ‘made the deal’ with China.
If anything, China is now the one playing hard to get. The Chinese administration knows that no deal is secure with a volatile Trump. Most likely, President Xi is watching President Trump’s approval ratings closely, hoping that the more controversy he steers and the weaker the US economy becomes, the less likely he is to get re-elected. Let’s face it, a new President, whether Republican or Democrat, would probably be as hard on China, but also far less volatile and more reliable in the negotiation process.
In all of this whirlwind of contradicting news, the market seems to have created a new investment style
Forget all the talks of value versus growth and momentum that we have heard to exhaustion over the last few weeks, and welcome to the brand-new pinball style. In a world of binary outcomes, markets have been bouncing off tweets in whichever direction makes more sense at the time. The trade deal is on, equity markets are up and risk-on trades outperform; the trade deal is off, equity markets are down and turn more defensive.
This has been evident from the direction of the market since early September, when the resumption of the trade talks was announced. Since then, the US equity market has underperformed Japan, EM and Europe, and the value style has made a comeback across all those markets. Admittedly, the outperformance of value was more convincing in September, but it has continued to defend itself in October as well. The value vs momentum reversal was particularly dramatic in the US in September, which is to be expected as the correlation between value and momentum is at near 30-year lows, i.e. value appears extremely oversold.
Neither the outperformance of value nor the outperformance of equity markets outside of the US have been too convincing. This is not surprising, as global growth and earnings continue to deteriorate, with earnings revisions worsening across all major regions. Therefore, for either value and equities outside the US to show a more convincing outperformance, we need to see some macro improvements or – at the very least – some positive news on the trade front that would make those macro improvements more likely.
In this apparent see-sawing madness, the latest market movements have shown us is that investors are ready for a change
However, in this apparent see-sawing madness, one thing that these latest market movements have shown us is that investors are ready for a change. They just need a trigger. A Phase 2 of a trade deal would most likely spur EM and Japan further and, unless Brexit were to end in a mess, Europe would also follow. US equities would underperform and – within markets – risk-on trades including value and cyclicals would finally be in favor again.
Of course, no resolution or a meaningful setback in the US-China negotiations (such as a resumption of the planned tariffs) would bring the risk-off stance back, with global equity markets underperforming other asset classes and, within equities, the US market and more defensive bets would most likely prevail.
The binary outcome is reflected in our investment team’s five-factor outlook, which is now neutral for both developed and emerging equity markets. The neutral conclusion indicates that the pinball could bounce off the next set of tweets and news flow in either directions. Yet, while the news outcome might well be 50:50, the risk-reward is asymmetric. Markets outside the US have already priced in a lot of uncertainty, and earnings growth (or lack thereof) is now at levels that do not justify the wide disparity in valuations.
Take EM, with an expected earnings growth of 2.3% for 2019 and a PE of 13.2x versus the US’s 2.3% and 18.6x respectively. For Japan and Europe, earnings are expected to fall by 0.9% and grow by 1.3% respectively, priced at a P/E of 13.7x and 14.8x respectively. While further degeneration in either the trade war or – limited to the UK and Europe - Brexit is likely to cause a negative price reaction, the upside that would be triggered by positive news at this point looks far greater.
The upside that would be triggered by positive news looks far greater
Clearly, the next question to answer is: would a risk-on sentiment triggered by positive news on the trade front last? It would all depend on how quickly the global macro backdrop is able to recover and, with that, corporate earnings. With the world’s major central banks remaining supportive and the Chinese government continuing to gradually stimulate the domestic economy, we just have to hope that the positive market momentum lasts long enough to give corporates time to resume their spending plans.
At this point, we don’t know if we will have a trade deal any time soon. What we can tell is that the pinball is eager to bounce off in one direction. Needless to say, a trade deal now does not solve what are likely to be long-term strategic tensions between the US and China. These will likely remain for the foreseeable future, as the competition between the two countries and technology security will be long-term issues.
Yet, it is difficult to see now any measures that could have the same crippling effect on global growth than up to 25% tariffs on more than USD 650 billion in US-China bilateral trade. Let’s see where the flippers and bumpers of our pinball machine take equity markets next. One thing is for sure, if they flip equities in the direction of positive outcomes, market dynamics are ripe for a game-changing bounce.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.