Trump, Trade Wars and the End of the Cycle
Are we near the end of the cycle?
We're certainly closer to the end of the cycle than we were 10 years ago. Time has passed very quickly – we're nearly 10 years on from Lehman Brothers. I think what people worry about now is some end of cycle crisis.
We're not concerned that we're going to see a big deep recession; we think the likelihood is that we're already in a new era or a new stage of this cycle, with lower growth, higher valuations and more volatility – but that shouldn't be misunderstood as a crisis. It just requires a little bit more thought and a little bit more nuance around portfolios.
What risks do you see in the year ahead?
One risk is a full-blown trade war. We don't think Donald Trump wants to embark upon a trade war. We believe he cares about the stock market; we believe he cares about reelection; and a full-blown trade war will help neither of those things in our view. But we're seeing a change in voter preferences.
Donald Trump is effectively enabled by people wanting him to make America great again, to make growth and wages go up; if there isn’t, if there’s higher inflation and lower growth, that would be negative for global equities and for the global economy.
There are two narratives in the market, one of which surrounds higher growth and inflation and which posits Donald Trump is going to make inflation great again. We're not in that camp, nor are we in the secular stagnation camp that contends we're in a low-growth world forever.
How have you been taking advantage of uncertainty in the current environment?
I think one of the good things about the way the market environment has evolved from last year –where 2017 was all about positive surprise and optimism whereas 2018 has been much more mixed – is that you get to upgrade your portfolios.
Specific actions we've been taking have included adding to semi-conductors, where we think there's a really good setup for the back end of the year. Some of those companies have really disappointed given the weak sales of the iPhone X. We've also been adding Facebook around the congressional hearing.
And again, that's a chance to add to a company where we think we've got a good valuation, good growth and where there's more controversy, and that's the key benefit of seeing perhaps some of this volatility come back to markets.
What types of companies are you looking for today?
We're in a lower growth world, which is likely to be the case for the next stage of this cycle – but again, that shouldn't be misunderstood for a secular stagnation. We're still seeing growth. It's just perhaps lower and attached to more modest inflation because we don't have a debt cycle coming.
Demographics and demographic growth is weaker, and technology is actually proving to be quite deflationary. In our view, the way to invest in this era is to find companies that can actually define their growth futures, which can grow in a low-growth world, and which are disruptive on the right side of change.
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