Markets remain under some cloud cover. That said, stocks remain fairly calm and content in
the U.S., though more volatile overseas – particularly in emerging markets, where selected currencies have come
under heavy pressure.
The latest catalyst for anxiety is, primarily, Turkey. Its obstinate leader ignores economic conventions and
shatters central bank independence. Though many other emerging economies hew rather more closely to
economic orthodoxy and implement accepted and healthy economic courses, commodities have been volatile and
there are enough concerns to frazzle nerves. The heat has also been turned up by U.S. sanctions on Russia
and Iran, devastatingly poor leadership in Venezuela, and trade conflict everywhere.

Tony Caxide

North America

Tony M. Caxide, CFA®

Chairman - Senior Investment Council

The government’s first estimate of economic growth for the second quarter was a strong 4.1%. This is broadly viewed as skewed upwards by temporary factors, even as tax cuts do provide support that should last longer. But the growing government deficits and debt that are required to fund the tax cuts remain a nagging worry. Further, in its benchmark revision of the national accounts, the government concluded that pre-tax “economic” earnings were actually $912 billion lower, since 2012, than previously estimated. We and other institutional investors view this measure as less distorted and more reflective of the economy’s overall sustainable earnings power than per-share earnings. Although recent growth rates have not changed hugely with the revision, the substantially lower level of earnings translates into a more expensive market than previously thought.

Jeffrey G, Wilkins


Jeffrey G. Wilkins,

Deputy Chief Investment Officer

Japan’s central bank recently announced a small change in its yield curve control policy, allowing bond yields to fluctuate within a slightly wider range around their target. While this is only a modest adjustment, perhaps most significant in the update is its pledge to maintain monetary easing for the foreseeable future and provide some level of forward guidance, rather than maintain the element of surprise. Other developed-market central banks appear to be moving toward monetary tightening, so the Bank of Japan’s comparatively loose monetary stance may have a larger positive impact on domestic growth and inflation going forward. With the growth of several key trading partners slowing and some Japanese manufacturing activity indicators rolling over, the ongoing support of monetary policy appears necessary for Japan’s continued growth.


Srinath Sampath, CFA®, PhD

Managing Director, Portfolio Management

Headline inflation hit 2.1% in July, largely boosted by high energy prices. The last time this series saw a print in excess of 2% was in 2012. With an inflation target of ‘below but close to 2%’ looking realistic now, the ECB plans to end the extraordinary stimulus of its bond-buying program in December while still continuing to reinvest maturing bonds to maintain current program levels. Rates are expected to be held at current low levels past year-end. The European economy has witnessed some cooling in the last quarter: the most recent growth rate is 2.1% and retail sales are softer. However, unemployment has declined to its lowest level since the Global Financial Crisis, industrial production is strong, and the euro at $1.16 is still weaker this year. The ‘million-euro’ question remains: Will the eurozone stand on its own when the scaffolding of quantitative easing is dismantled?


Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

It turns out that the less favorable UK data in Q1 was indeed caused by the nasty weather, as Q2 data improved substantially – especially in household borrowing. Despite the slight fall in manufacturing and service Purchasing Manager surveys in July, their overall levels suggest that the UK economy had a reasonably good start to Q3. As a result, the BOE understandably started its gradual process of policy normalization by increasing its Bank Rate from 0.5% to 0.75% on August 2. However, the Monetary Policy Committee’s hawkish stance on inflation and GDP growth forecast created some concern that it may tighten policy too quickly. The recent economic data is OK but not excellent. And the uncertainties of Brexit negotiations still loom over the horizon.

Emerging Markets

Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

The trade conflict between the U.S. and China has escalated, with the U.S. threatening to impose 25% tariffs on $200 billion in Chinese exports and China threatening retaliation with up to 25% tariffs on $60 billion in American imports. Trade remains a topic in efforts to renegotiate NAFTA. And although the U.S.and South Korea tweaked their long-standing agreement earlier this year, more recently South Korea threatened to rescind it unless it’s granted waivers to the planned auto tariffs. The strong rhetoric has not damaged EM trade volume to this point. Chinese exports actually increased 12.2% in July (Y/Y, in $) vs. 11.3% in June. However, these growing trade wars could be reflected in slower trade the second half of the year. The growing tension was certainly reflected in manufacturers’ confidence, which fell. This could suggest that EM economies are starting to lose some steam, especially in Emerging Asia. This hypothesis is further supported by the fact that China’s policymakers decided to add stimulus in the face of escalating trade tensions and in the middle of their domestic housing bubble deleveraging process.