Overview

One of our philosophical cornerstones is that causal factors will determine if we’re headed to Berlin or Brisbane, but we certainly won’t get there in a straight line. Rather, we will bounce off the guardrails along the way, driven by unpredictable triggers that are, by definition, impossible to anticipate. So, we don’t try to predict these triggers, though we do assiduously monitor our environment for them.

It’s just possible that recent rhetoric from North Korea, and the U.S. president’s “fire and fury” response, could be one such event. It could fade away to nothing but a brief chapter in this confrontation, and we’ll hope for that scenario. But it could become a causal factor itself, which is more likely to be a bad thing than otherwise. There’s also a good chance it could serve as a catalyst for heightened market volatility, even if the real culprit is the “dear” level for prices in many financial markets.


Tony Caxide

North America

Tony M. Caxide, CFA®

Chief Investment Officer

U.S. data continues to transmit conflicting signals.

For instance, we’ve long closely monitored bank lending standards (the supply side of the credit equation) to provide helpful insight into economic growth and valuation metrics. Issued simultaneously is demand for loans (the demand side).

These two series typically are aligned. But recent releases paint a unique picture. Bank lending standards have recently loosened (even if modestly), meaning that banks are looking somewhat kindlier on borrowers than before. Generally this is associated with a more benign economic and financial markets environment. However, borrowers seem less interested in obtaining loans, as demand has been falling for quite some time. Unless this reverses, we could decide to tweak our portfolio construction toward greater caution.


Jeffrey G, Wilkins

Japan

Jeffrey G. Wilkins,

Managing Director, Portfolio Management

In Japan, several macroeconomic factors continued to improve recently, including industrial production, domestic consumption and various consumer confidence measures. Despite this and tightening labor markets, Japan Inc. continues to resist raising wages for its workers and inflation remains tepid. While monetary policy is still very stimulative, growing political pressure on Prime Minister Shinzo Abe is creating some uncertainty about an upcoming election. Any change in leadership could have a meaningful impact on expectations for monetary and fiscal policy going forward. If markets begin to anticipate a tightening of policy due to a likely leadership change, this could lead to a stronger currency, which could create significant headwinds for corporate profit growth in the future.


Srinath Sampath

Europe

Srinath Sampath, CFA®, PhD

Managing Director, Portfolio Management

Despite murmurs of discontent, the European Quantitative Easing program continues along its steady trajectory of purchasing €60 billion of bonds every month, with ECB President Mario Draghi standing resolute in his efforts to keep the program on this path through at least the end of 2017. This stimulus, coupled with low lending rates, continues to support the European recovery. The economy is growing at about 2.1%, a welcome improvement from the 1.7% growth rate scarcely a year ago. Unemployment for the region has ticked down from a cycle high of 12.1% in 2013 to 9.1% in June. Countering the easing maneuvers is the euro, which has strengthened 12% versus the U.S. dollar this year. Despite this currency move, core inflation has climbed gradually to 1.2%, which, while still below the ECB’s target inflation upper bound of “below but close to 2%,” is a step in the right direction.


Sheng-De Jeff L. Liu

UK

Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

UK manufacturing and service-sector indicators remain at robust levels, buoyed by strong overseas demand. This purchasing managers’ optimism may or may not translate into real economic data. The UK economy ended the second quarter on a disappointing note (0.3% Q/Q). Industrial production and manufacturing production are running at a flat or slightly down pace. Construction output posted a surprising 0.1% decline in June. The trade deficit widened to a nine-month high, despite a weaker currency. British consumers are walking on thin ice amid a squeeze in income. It appears that the Brexit uncertainty is gradually biting into the real economy. On the bright sight, the downbeat assessment of the UK economy offers little reason for the BOE to lift interest rates.


Sheng-De Jeff L. Liu

Emerging Markets

Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

So far the new U.S. administration’s strong words on trade haven’t translated into policy. This is a good omen for EM countries. The trade balance of most EM countries, from China to Brazil and from Mexico to South Africa, improved this year, helped by higher oil and other commodities prices. However, risks remain. With China’s financial concerns elevated, the growth there might slow. The effect could spill onto other emerging countries. In addition, country-specific problems also troubled some important EMs. India’s manufacturing index was sharply down in recent months. Indonesia’s manufacturing sector also dipped in July. South Africa’s manufacturing contracted 2.3% Y/Y. And North Korea’s war rhetoric could bring further uncertainty to East Asia.