by David Rogers
Magellan’s Hamish Douglass may not be one of Donald Trump’s biggest fans, but he agrees with the US President on one thing.
When it comes to the US-China trade relationship, Magellan’s chief investment officer and co-founder acknowledges that China is competing unfairly.
During the Future Generation Investment Forum at the Westin in Sydney yesterday, Douglass said the US-China trade relationship was one of the two biggest issues on his mind — the other being the outlook for US inflation and monetary policy. Nightly and sometimes hourly tweets by Donald Trump have increased the level of “noise” investors have to deal with, but Douglass said the US-China trade relationship was a “very deep strategic issue” and investors needed to assess whether there would be a deal.
“We’ve now got a very large emerging nation that is challenging the US for economic and military supremacy,” he said.
“I actually think Trump isn’t right about a lot, but he is right about the core issue that they appear to be doing it on unfair terms.
“They’ve been stealing intellectual property, they’ve been requiring foreign companies who want to participate in their massive market to transfer their IP as a cost of doing business, and if they can’t get it, they go and steal the technology through their cyber theft. They have massive state-owned enterprises, which get huge subsidies.
“They use those subsidies to take market share on a global scale. It’s a very real issue and the US is trying to reset that relationship … but China has outlined a list of industries it wants to dominate.”
Investors were caught napping when the US dug its heels in this month by applying the threatened 25 per cent tariff on $US200 billion ($291bn) worth of Chinese goods and planned to tax the rest of imports at the same rate after China wanted to change the deal.
But while China’s Shanghai Composite fell as much as 13 per cent from its recent high and the US S&P 500 fell 5 per cent — falls that at one point this month saw Australia’s S&P/ASX 200 dip almost 3 per cent before political relief and expectations of interest rate cuts this week pushed it up to a fresh 12-year high — Douglass says financial markets are still broadly betting on a trade deal.
Their hope is that presidents Trump and Xi will patch things up when they meet on the sidelines of the two-day Osaka Summit of Group of 20 leaders’ meeting, which will no doubt capture the attention of every investor when it kicks off on Tuesday.
And in Douglass’s mind that is the right call, although a trade “cold war” is still a possibility.
“It’s become a little more uncertain in the past few weeks whether or not this will actually be resolved,” he said. “We could get into a severe, trade-war/cold-war environment or we could actually have it settled and it’s very difficult to know which way this coin is going to flip. The markets are pricing that Trump is going to do a deal with Xi.
“Our best assessment is that it is probably the most likely outcome, but there are political overlays — what is the best thing going into the presidential election in 2020, maybe a dispute with China and immigration should be the big topics.”
Indeed the trade dispute is a major focus for Douglass and he’s tapping into experts in Washington and China to assess the outlook.
But the second big issue, which is more important in his mind, is “what’s going on with US monetary policy”.
“The reason it’s so important is because when you’re an investor, you have to make an assessment about where interest rates are going to be in the future, because risk-free interest rates effectively set the discount rate (to value risky assets like shares),” he said.
“The market doesn’t really know what the discount rate is any more because the central banks came in with massive monetary printing exercises, known as quantitative easing, and they have taken these rates down in Germany to zero.
“Do we really think interest rates are going to be zero infinitely and the US long-term interest rate will stay at 2.5 to 3 per cent?” he said.
“I can tell you, if long-term interest rates are currently 2.5 to 3 per cent, most equities in the world are currently a bargain, but if they go back to where they were historically, around 5 per cent, most markets are pretty expensive at the moment,” Douglass says.
Central banks globally have pivoted hard away from interest rate hikes this year in response to sharemarket jitters and slowing growth, but the outlook for inflation and interest rates should figure into longer-term analysis of the sharemarket, Douglass says.