Knowledge. Shared Blog
August 2019
Trade War Tension: Look Past the Noise to Navigate Uncertainty
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George P. Maris, CFA | Follow Co-Head of Equities Americas | Portfolio Manager
Markets sold off sharply this week after a sudden escalation in the U.S.-China trade war. George Maris, Co-Head of Equities – Americas, explains why the reaction was so severe and offers insight on how investors can navigate this period of uncertainty.
Key Takeaways
- The sudden escalation in the U.S.-China trade war this week caught investors off guard, causing a major global sell-off in markets that had been hitting record highs.
- While the trade dispute will likely lead to more volatility in the near term, we believe that all the incentives are in place for both parties to reach a positive outcome that will ultimately create a good backdrop for global growth.
- In our view, the volatility we’re currently experiencing could create opportunities to find attractive valuations in both growth- and value-oriented companies – particularly for investors who can look past the noise and take a long-term perspective.
George Maris: We really were at year highs for most markets around the world, if not all of them. And so part of it was just positioning. People had maybe gotten a little bit overextended, maybe a little bullish, overly bullish, or feeling nervous about their positioning and quick trigger fingers the minute something happened to scare them. But the trade war really is a scary phenomenon; it’s stagflationary, which means it causes both a slowdown in growth and inflation simultaneously. And that is worrisome. The latest bout from the U.S. was a surprise, and I think it caught people off guard. And the market doesn’t like surprises, and so I think there was an element of more randomness and feeling like there was more randomness coming from federal policy in the United States. And then seeing the Chinese response, which was also aggressive – the wording was harsh – certainly didn’t help things.
And then seeing the yuan break through 7, really hasn’t been done for a long time. And when it last was done, it was a significant indicator of Chinese currency weakness, and weakness in terms of what it means for their balances and what that follow-on effect is. So I think there was a lot of nervousness that was caused by a very real event on top of a market that’d been hitting highs.
It’s a perpetuation of the volatility we felt certainly for the last 11 years, post now GFC. And frankly, we’ve had to live with volatility in equity markets for a long time. I think we get acclimated and we forget how painful things in the past were. But you go back to 2013, we thought Cyprus was going to go ahead and roil the world. My guess is most people can’t find Cyprus on the map again.
So I think this, too, is likely to pass. It doesn’t mean it’s not real, but I do think people will figure out how to solve this issue. It’s too important for China, it’s too important for the United States not to get to a good outcome, and so I think they’re likely – all the incentives are in place for them to get to a good outcome on trade.
And when we get to that outcome on trade, it likely sets forth a good template, backdrop, for global growth around the world. But we weren’t all that long ago, speaking from a U.S. perspective, from NAFTA being torn down and some really harsh language being used about both the partners within NAFTA. And now, we’re at a place where that’s solved, settled and looks to be signed.
I wouldn’t be surprised if the situation with China and the U.S. doesn’t follow that template: some harsh words in public, certainly some very difficult stances in private, but we get to an accommodation over the next several months, and we continue to move forward. So I don’t think this is intractable. I think it’s solvable. And we’ll start moving forward there with a good, healthy backdrop.
Look, I think one of the advantages for being here at Janus Henderson is that we’ve got a longer-term time horizon. We’re investing over multiple years. We’re trying to really generate excess, outstanding excess returns over three- and five-year periods. What does that allow us to do? It allows us to get past the noise and the volatility and use that to our advantage.
So when the market’s selling off completely – that’s good companies and bad companies selling off simultaneously – that allows us to really identify the good companies and buy them at attractive prices and invest in them for the long term for when that volatility subsides, and that uncertainty and that fear element subsides. And so what does that mean?
It means that companies that we think are tremendous growers, that will grow strongly over the next five and 10 years, that are truly secular growth companies who are redefining barriers, they will have – or redefining opportunities, excuse me – they will be on sale because everything’s getting sold. Meanwhile, companies that are more cyclically oriented, that are really high quality but just have more of an economic, more economic sensitivity, they’re going to be hit even harder. But high-quality companies, there will often be selling for valuations that are extraordinarily attractive and offer you good cash-on-cash returns so you can invest there as well. And that’s what we’re doing. We’re using the opportunity that the volatility creates in the market to buy those really attractive companies, whether from a valuation perspective or a growth perspective – and oftentimes, both simultaneously – to take those positions that will really enrich our clients over three and five years.
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