Word on the Street
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Emerging markets, kebabs and other distractions
Stephen Peters, Head of Equity Fund Research speaks to Will Hobbs, Chief Investment Officer about the trade deal between the US and China and whether now is a good time to invest in emerging markets.
Welcome to Word on the Street a weekly podcast from Barclays UK where our experts help ordinary investors make sense of the latest news and events impacting the world's financial markets.
This week we talk about the trade deal between the US and China and whether now is a good time to invest in emerging markets, with Stephen Peters, Head of Equity Fund Research, and Will Hobbs, Chief Investment Officer.
STEPHEN PETERS: Hello everyone. My name is Stephen Peters and I'm Head of Equity Fund Research and a member of the manager and fund selection team. This week we're speaking to Will Hobbs, CIO, and as usual we will try to cover a pretty busy week with impeachment proceedings hotting up in the US, the signing of a monster trade deal, and quite a lot of other bits and pieces. One thing I can assure you, though, we are definitely not speaking about the topic of the latest awkward portmanteau word which is “Megxit”.
WILL HOBBS: Nice that that's replaced like “Watergate”, everything being sandwiched "gate". At least we can now start sandwiching on "exit".
SP: So Will, I note the decision has been made to change the exposure on multi-asset class funds. We'll talk about that shortly but let's start off with the US and China trade deal being signed this week. It didn't seem like markets reacted much. Is it just the end of the “phoney war” or perhaps something more meaningful?
WH: Stephen, lovely to have you on the podcast. A couple of things to point out here from our perspective. One: as most people have agreed this is quite a light deal in many senses. Many of the thorniest issues have not been tackled, sort of understandably they're all very thorny, such as state subsidy for SOEs, state-owned enterprises, and things like that. The second point is that much of the nature of the deal, if not the details, have been well telegraphed. So markets have had plenty of opportunity, investors have had plenty of opportunity to react and incorporate this kind of new information. So that's probably why markets didn't react too much this week.
SP: Is it just another case of sell the rumour and buy the fact in global markets then is that…
WH: That is the difficulty isn't it with markets? You've always got to try and think ahead. They're trying to anticipate events and so you tend to find that you get a very short time span to react to these kind of things.
SP: So that brings us on now I guess to your call that is the aim to increase our weighting in emerging market equities. Emerging markets I remember going back a decade or more were the hot topic. Nobody quite talks about emerging markets today in the way they did. So this increased emerging markets: tell us a bit more about that.
WH: Well, yes. I think the point here is that the most recent batch of Chinese trade data showed a bit of perkiness after quite a long period of looking much less perky and obviously you don't want to get too carried away with one month's trade data. Trade data tend to be pretty volatile but I think for Asia's prospects in particular it's not the only data point that's telling us that that things are picking up a little bit in the region. And actually given Asia's importance in the technology and large parts of the technology sector’s supply chain, you can actually keep an eye on things like chip cycle – that's microchip rather than the deep-fried variety obviously or sadly – but what we are seeing is some interesting signs there and some of the region's trade hubs, so Korea in particular, you're seeing trade data pick up a little bit more there.
Now when you find that growth is picking up in emerging markets and particularly the trade sensitive variety you're seeing trade data pick up and that type of growth pick up, historically that's tended to be quite a good time to try and own equities. If you think that growth is picking up, you tend to want to own a proportional stake in that growth and that tends to lean you towards that. And like I say the nature of this pick up probably leans you more towards emerging markets at the moment. The other point here is that developed equities, i.e. those in the developed world, the UK, the US, particularly the US, did incredibly well last year. And EM equities, emerging market equities, did a little bit less so. The trade wall was probably part of that. So what we're seeing now is that growth is picking up in a way that has tended to be more helpful than not for emerging market equities in the past and many are arguing that the approach of the US presidential elections at the end of this year may help stay the White House's hand a little bit. And all of that is creating a kind of you know potentially more attractive environment for emerging market equities to outperform, to do well I guess. And that's why we've added a little bit of exposure there.
SP: I know the presidential election cycle is one that the fund managers that I speak to are starting to bring up in conversations. But it's a big world out there and there are lots of other political events. What are the other political unknowns that you and the team are discussing at the moment?
WH: It's a long list, it's always a long list obviously, as you know Stephen. and this is part of the game. And this is why I think all of us in this area where we're trying to create value for clients tend to have a bit less hair and that we do have is quite grey I think. We can all testify to that – it's tougher in winter isn't it I think without hair. But if you look at the US obviously you've started to see as you mentioned earlier impeachment proceedings moving to the Senate which is the trial stage. I'm not sure there's much in this for markets to think about in reality or to get to interested in but you can expect lots of headlines for sure. Europe looks very busy as we've all come to expect. So just going through a rough list: Italy, you've got a precarious coalition as we all know with Matteo Salvini and the League waiting in the wings; the coalition in Germany is also looking quite fragile; the French administration is doing battle with the French population on pension reforms; Spain ,you've got a minority government as the result of two snap elections last year, both of which returned hung Parliaments; you've got obviously tricky Brexit negotiations, I mean the real meat of Brexit negotiations. However in most of these situations we can probably suggest still that a muddle through is probably the most likely thing. We will need to keep an eye on all of these and we expect to have a little bit less hair at the end of year probably. Definitely.
SP: So the word is to be stoic, or the phrase is to be stoic. And that reminds me of the thing we've seen in the news in the last few days about the man in the kebab shop in in Portsmouth who was most definitely stoic while chaos was ensuing around him. Is that a good euphemism: avoid the noise and stay the course?
WH: That was at Ken's Kebab House. I think that probably maybe overstates the degree of noise that investors have to put up with but certainly that is a good analogy. And as it goes actually, and looking at Europe in particular and thinking about all of those political events, we would actually expect the euro area economy to brighten quite a bit this year, in line with that better global picture for manufacturing and trade, the manufacturing trade-oriented parts of the global economy. That is probably the more important context to keep an eye on. But obviously with all of these political events we have to keep an eye but for long-term investors much of it doesn't really matter.
SP: And the final random fact of the day is that turkeys aren’t actually from Turkey, they are native to North America. But I don't speak Turkish do you? Do you speak Turkish?
WH: You know what funnily enough, this is weird but I did. I was sent to Turkey to learn Turkish in Ankara when I was 18 but unfortunately I did try it out in a kebab house the other day. But I then found out that actually it wasn't a Turkish kebab house which was a little bit embarrassing but anyway unfortunately my Turkish is now limited to pretty much saying: "I'm 18 years old and I'd like two beers". So "on sekiz yaşındayım" and "iki tane bira". That's it and I can't even say please. So it's kind of rude and out-of-date that's the main problem with my Turkish.
SP: I take your word for it and I hope they're not swear words. So not enough to talk about the rationale behind the Turkish central bank's cutting interest rates?
WH: Probably not. But I would say there is always an interesting point on the Turkish central bank to make about central bank independence because the context behind here is obviously that Mr. Erdoğan has been telling or urging the central bank to lower interest rates into single digits. And his somewhat contrary idea relative to economic theory suggests that if you have an inflation problem you tend to have to right raise interest rates not cut them but Mr. Erdoğan has argued in the opposite direction, that actually cutting interest rates lowers inflation.
But there's a long history of political interference in central banks; this is not just a Turkey problem, it's an all over the world problem. And we've said a number of times: in the US there was a famous – Lyndon Johnson basically hauled William Martin down to his ranch and I think it was 1965 and he basically sort of almost pushed him around the room apparently and said: you know my boys are dying in the mud, you need to start printing money and cut interest rates. It's not just you know Lyndon Johnson. Nixon apparently was obsessed with the idea that JFK beat him in the 1960 election because the Fed raised interest rates and so in 1972 he got them to comply. The story goes on and on and I think the major point to take from this is: it's a great idea to separate political politics from interest rates because often you have to take very unpopular decisions as a central bank and you don't necessarily want those decisions in the hands of people whose job is to remain popular to a certain extent. So I think that's one of the things one of the things I'd point out there.
SP: Okay, well I think it's time to leave it there. Thank you, Will, as always. And thank you everybody for listening. The usual plea at the end of podcasts, which is a good one, is if you do like it please consider giving us a review and a five-star rating on whichever podcast app you use. And with that I'd say thank you. Will, and thank you for listening, and goodbye.
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