The Pride - Issue 5 - Autumn 2021 - Magazine - Page 13
ASIAN EQUITIES
Fund managers: Mark Williams, Carolyn Chan, Shashank Savla
Liontrust’s Asia team on Trump’s trade wars, political posturing, and how Philippine facilities are
helping companies navigate the tumult.
The US-China ‘trade war’ has become
a defining feature of 2018. While the
majority of the world (ourselves included)
originally thought that President Trump’s
trade posturing was just that, posturing,
there is a growing belief that he is
actually trying to contain China’s rise in
global stature.
Whether Trump’s ultimate aim is shortterm appeasement of US voters or longerterm containment of China, we think the
risks are already priced into markets.
Our base case remains that Trump
is still looking to engineer a ‘victory’
with China, publicity from which will
far outweigh the long-term economic
impact. Global muscle-flexing appears
to have increased Trump’s popularity
at home so the current escalation of
tensions could be part of a strategy to
concoct some headlines. While this
strategy might lead to rising prices
that could test the enthusiasm of both
corporations and voters, the short-term
political benefit seems clear. Having
said that, things have already gone
further than we originally expected, with
likely longer-term effects.
operational 14 years ago, and from
others it seems that Vietnam is likely to
be one of the biggest beneficiaries of
the process. Few executives have any
strong opinion whether trade wars will
escalate further or subside, but they
all understand they need to prepare
themselves for a global trade order that
may be different from recent history.
One such effect is likely to be a need
for companies to ensure they have
sufficient capacity outside of China.
One way of avoiding tariffs is for
Chinese companies to complete part of
production in other countries, as only a
proportion of work has to be completed
elsewhere to claim a product is not
Chinese. We have spoken to one
company that is looking to re-open
Philippine facilities which were last
The redirection of investment to other
economies will damage China’s
growth prospects to some degree, but
the government has plenty of stimulus
measures it can use to offset this. It is
clear that trade wars are destructive,
and this one is worse than we would
have predicted a year ago, but markets
have moved very swiftly to reflect
events. In our view, fragile investor
sentiment has led to an over-reaction.
EUROPEAN EQUITIES
Fund managers: James Inglis-Jones, Samantha Gleave
The managers of the Liontrust European Growth and Global Income Funds on why European
markets look fragile.
If I were to tell you that one conclusion
from our latest analysis of company
balance
sheets
and
investment
conditions was to label the investment
environment as ‘uncertain’, you might not
think it a classification that is particularly
portentous for investors. Worse, it might
seem a weak assessment.
However, an uncertain environment is
exactly what we have identified and –
perhaps somewhat counterintuitively –
we think this can often represent a better
backdrop for our investment style than a
bullish market.
Our determination that the investment
environment is uncertain rests on
observations we make about corporate
and investor behaviour. While our
investment process is ‘bottom-up’, we
have found that aggregating our data
at the market level has some interesting
implications for equity investing.
At the time of writing, European markets
have tentatively entered a downtrend.
Despite recent falls, market valuation is
still high relative to history. We are also
now seeing signs that corporate overconfidence is beginning to pick up. This
usually takes the form of management
teams being overly aggressive in their
use of cash flows – investing very
heavily in order to chase growth in
earnings.
We find that when there is widespread
evidence of over-confidence among
corporate managers it is usually a
sign that equity investors need to
think about running for the hills. The
good news for equity bulls is that we
are not at this point yet, but the trend
is definitely concerning and is one that
we are monitoring closely.
Although we now face market conditions
which look increasingly fragile, an
uncertain market environment does not
imply poor prospects for our investment
process. Quite the opposite in fact.
We would much rather invest in weak
or neutral market conditions where
fundamentals are asserting themselves
on valuations than in a rampantly bullish
market where gains are indiscriminate.
Issue 2 Winter 2018 - TH E P R I DE - 13