Advisory Letter: 14th May, 2019

All wars have more losers than winners, but in my opinion a trade war doesn’t have any winners at all. Markets have been roiled over the past week after POTUS tweets and the following Chinese retaliation with tariffs on US imports that was announced on Monday. Uber IPO flailing at -17.6% since its IPO last week doesn’t help sentiment, as I am reading some commentaries that this was it for the IPO market and Private Equity. Lot of people are wondering, where are we going to go now from here? In my update last week, I said that I am more in the camp of ‘Sell in May‘ and I was a bit surprised myself how quickly this turned out now. In situations like this, I like to pause for a moment and determine where we are: The US economy in particular has been in a late cycle expansion. Tight employment, low inflation, but some signs of weakening in early indicators like PMI. And let’s face it, yesterdays close at 2811 in S&P is exactly where we were already in Jan 2018. So the stoic soul might just say that ‘The Market’ hasn’t done anything at all in the last 15-16months. It is the volatility in between that we are afraid of.
China imports to U.S. stood at a net $539 billion in 2018. This spans market segments such as consumer electronics, apparel, furniture and industrial supplies.
The latest move triggered by the renewed escalation of the US-Sino trade war has probably a bit further to run. Tariffs are acting on the economy (and ultimately consumers) like a tax. While Trump keeps gloating how good it is for the US economy, it’s for anyone to decide whether that’s indeed the case… or not, since already stretched farmers in the Midwest are losing an important market to sell their products to, which they then have to dump then elsewhere. From a game theory perspective, I believe that what has happened now also means that trade war resolution is further drawn out since both sides have hardened their stance. We could well be in a situation where this tit-for-tat keeps dominating headlines over the summer. I also think that China is now in a much stronger position than just 6-9months ago, hence the lack of hesitation in retaliating. Trump has taken a gamble by raising the ante last week, and we will soon see who has been bluffing. I am expecting to see a bit more downside from here as expectations get managed, and deal data from yesterday showed an increased number of deal flows reducing equity allocations. The next support levels are in the 2,730-2750 area on S&P, but below that we are opened up to the 2500-2600 region as the first key support to add on risk. Implied Volatilities for options keep on rising which tells me there is still a strong underlying demand to reduce risk. It is always hard to call a bottom on markets, but from my perspective it seems that we still have some room to go. We are working hard to scan the market for entry opportunities in sectors that will not be impacted as hard by the trade war or even profit, but meanwhile it is safer to keep a higher allocation to fixed income and to defensive sectors like real estate or insurance, which are less likely to be impacted by the current headlines. Sincerely, Thomas