PATRIOTISM? THE US GORILLA AND THE BREXIT?BOMB?

This week I’m working on a couple of detailed articles that I hope to share with you soon. Last weekend my wife Jenny (aka Mrs. JB) and I drove the ‘North Coast 500’ around the Highlands of Scotland (www.northcoast500.com). It took in some of the finest driving roads in the world, and while the weather was less than optimal, it did not diminish the returns of the vistas nor the overall experience. Most of the time, I am very proud to be Scottish; chronic national health, illiteracy and drug abuse notwithstanding. TheHighlands can at times be viewed as insular towards ‘incomers’; in the main they are a welcoming people, but it does feel like a different country to the lowlands of Glasgow and Edinburgh. I was proudest when Scotland voted clearly to remain part of the Economic Union and, with the many signs displaying EU funding for roads, projects and infrastructure, it was not hard to see why.

It reminded me that no country is in itself the same economically, politically or culturally, let alone the tensions that then arise between countries.  It also brought into sharp focus patriotism and nationalism following an evening’s debate in the Raichonich Hotel with a Yorkshire based ex-City accountant (and Brexiteer) who was also visiting the area. Some thoughts then about the counter-pressures of nationalism and globalisation, as well as the ‘sisters doing it for themselves’ this week…

Theresa ‘Steel’ May met Metal Merkle, and Monsieur Hollandaise ahead of a delayed Article 50, as the UK looks set to wrestle with a slow ‘Brexit’ process. Gina Miller, of SCM Private, legally challenged Brexit this week on grounds of no exit strategy and that it would need to be ratified in law by MPs. I am sure about half the country will be appalled and half over-joyed at the prospect. The case has been petitioned to the High Court and may well go to the Supreme Court.

Meanwhile as 2018 approaches, I have written before about the (delayed) transatlantic trade agreement between the US and Europe looms. Heading into those negotiations the US looks to have the stronger hand irrespective of whether Lord Trumpet de Bouffant or Ferrous Femme Clinton takes the oval office. Trump’s Republican nomination will now invariably drag Hilary right on foreign policy, trade and crime.

 The value of the US consumer is estimated by Macquarie at $13 trillion dollars or roughly the total GDP of the European Union. US unemployment is at historical lows, wages set to rise, the dollar has strengthened and household debt has fallen. The US consumer buys domestic and import goods equally, a rising sense of ‘made in America’ patriotism resonates. However the US (like the UK) is deeply divided geographically and socially on issues such as racial discrimination, immigration, crime and wealth division.

Recounting my previous blog on political risk, US markets too look forward to the election as it historically predates a period of strong stock market returns, on average 18 months. Clearly these will have upward pressures on the stoic and slow inertia Federal Reserve. Any increase to rates will steepen the long end of the US Treasury curve and potential re-price more duration risk back into US and global bond markets. Politically the US looks ready to play hard with the rest of the world and with it threaten globalisation, movement of persons and investment.

Moreover, at a time when emerging markets have looked more attractive on valuation, and have been performing well in 2016; then a strengthening dollar, reducing freedom of movement and increasingly combative global trade agreements bode badly for exporters. Countries appear to be moving further apart and, within those countries, greater divides than ever. Thinking about how to try and invest through the noise.

 Potential ideas:

• US Equities over European Equities
• US and global structured products
• Long dollar versus other currencies
• Focus on strong US domestic driven companies (e.g. US Autos, retailers, financials)
• Quality companies importing into US that can benefit from a stronger Dollar
• Value reversion – companies trading below or near intrinsic value
• Overseas income producing stocks
• Selected Emerging Markets with strong domestic stories
• Global and US REITs recovering from recent discounts
• Countries and companies benefitting from lower range
• Recovering US High Yield debt following recent spread widening (if no rate rise)
• Quality Asset-backed, and floating rate debt pegged to the Fed or related interest rate (if there is a fed rate rise)
• Straddle options on S&P500
• Sector/stock specific Japan

 The risks: 

• Gold price softening as flight to fear trade abates
• US Export dependent emerging markets competing with US home brands
• UK and European property market
• Infrastructure and ADAC loans market
• Fed rate risk to bond markets
• Duration could lead to further spread widening for High Yield debt
• Falling confidence on UK negotiation with EU
• Export led companies leaving UK to relocate to EU
• US asset-backed debt: especially sub-prime in the Autos sector
• Overheating US property market (state specific)
• Hard currency Emerging Market debt
• China debt
• Japan index

 Go long Gorilla; short the world?

The above are just some of my own ideas. At Gemini we have a number of experienced managers who can offer a range of strategies to traverse global markets.

 Have a good week,

Jon ‘JB’ Beckett

Consulting CIO, Gemini