In a speech that has become legendary in American political science, President Jimmy Carter spoke in 1979 of the malaise that was eating away at the United States, calling the oil crisis a “crisis of confidence”.
In a sense, what nations and financial markets have been experiencing over the last eighteen months could be likened to a real loss of confidence in the fundamentals that used to help keep globalisation and multilateralism on an even keel. Furthermore, the carelessness of certain political leaders, who provide more in the way of anxiety than they do reassurance, has caused significant damage to the peace of mind of consumers and investors. In this climate, the security of investments takes precedence and sovereign bonds have once more become the only investments worth considering. However, the latest encounters with company managers have given no indication that a recession is imminent or that the global system is collapsing. A sustained slowdown with a few blips caused by external geopolitical events remains the core expectation at this stage. This means, therefore, that we can consider risky investments (equities with reasonable valuation multiples), although the volatility of such investments should be taken into account when making decisions about the allocation of these assets. The market volatility index (VIX) has lost nearly ten points since August (falling from 25 to 16).
This week, we’ve seen an easing of tension in Asia, and particularly in Hong Kong where Chief Executive Carrie Lam has withdrawn her controversial extradition bill and encouraged demonstrators to take part in talks. The possibility of a resumption of talks between China and the United States also sparked a little optimism, until the next tweet… This bounce was also fuelled by ADP’s publication of solid job creation figures in the United States.
The positions and arbitrages of recent months were suddenly reversed: long-term rates recovered, gold dropped, the dollar and the yen dipped and European equity markets rebounded.
Finally, in the wake of a series of setbacks at the hands of the British parliament, Boris Johnson’s difficulties have revitalised the prospect of a softer, delayed Brexit. The pound Sterling reacted immediately, strengthening against both the euro and the dollar. In mainland Europe, the formation of a more Euro-compatible, pro-European government in Italy (a coalition between the Democratic Party and the Five Star Movement) also staved off the risk of the assumption of power by Matteo Salvini, whose brutal rhetoric against Brussels was beginning to erode the meagre Italian recovery.
We must regain confidence; that was the message this under-rated American president sent us forty years ago, because “confidence has defined our course and has served as a link between generations”.
Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in September 6th, 2019.