Our portfolio had a nice start to the year, continuing into April to date. This was despite the same two unresolved major macro-economic issues, namely a US trade deal with China and Brexit, that had a deleterious Q4 effect. Indeed, these issues have created uncertainty in the markets for the last couple of years. There are recent talks however, indicating that a trade deal with China may be near.
The Chinese market was up 29% for the quarter and there are a slew of positive factors that contributed to the large gain, but we will highlight three reasons. The first is that after the worst annual performance in a decade, one would expect an uptick to an undervalued and depressed market. In addition, China’s National People’s Congress is looking to stimulate growth both for businesses and consumers. Lastly, there’s the long-expected MSCI China A-share inclusion.
MSCI confirmed its timetable of boosting its A-Share inclusion. It started including A-shares last year, and A-shares currently account for 2.5% of the index. This inclusion is a multi-year process that is planned to reach 20% by mid-2020. It will have a substantial effect on global fund-flows.
Global index investors will no longer be limited by investments in the large-cap and consumer stocks as they are now, but also in mid-cap A-shares. We see this as a positive long-term trend.
Macro-economic indicators continue to strengthen, as both the March PMI (manufacturing) and Caixin (services) data numbers reached their highest points since January of 2018. It has also been strongly suggested that monetary and fiscal stimulus will soon be re-introduced, which would further lubricate the economic engine.
Other eastern markets have hit highs as well. Asian shares overall are at six-month highs, and emerging markets are at an eight-month peak.
When it comes to Brexit, it was pushed off (again!) and it is unclear whether a deal will ever be reached. However, the MSCI UK and MSCI Europe-ex-UK gained 10.9% and 10.6% for the quarter, respectively. These similar performances do not indicate whether the UK or the rest of the Euro-zone will benefit from a Brexit or no Brexit, but we believe the deleterious effects predicted are vastly overwrought.
While the March UK PMI fell into contraction mode from its February print, the announcement has had little effect on the markets, as shares which would normally have seen a sell-off were likely spared due to the headiness traders were feeling over the Brexit-deal failure. The pound also ticked up.
On the home front, the Federal Reserve is pausing its tightening and curbing the US dollar’s rally.