24th February 2020
Compared to last week, there have been few changes to the big picture narrative: Thanks to the virus containment efforts enacted by its government, China’s labour force is only now slowly returning to work following an unusually extended Lunar New Year break. But most importantly, factories have restarted, even if at lower output levels than their trading partners would have banked on at the beginning of the calendar year. Because of the global supply chain interdependencies, and the temporary fall in Chinese demand, the resulting slowdown in industrial activity around the world is increasingly seen as a delay to the expected 2020 economic recovery. The upswing is unlikely to come in the first quarter, perhaps not even in the second, but after that activity levels are likely to jump up in the second half of the year.
On Thursday evening, there was a sudden rush to the exit in some of the highest valued stocks in the world. Those who have described current US valuations as being in bubble territory saw this as a vindication of their view. There was no obvious trigger for the sell-off. News wires might point to the rise in South Korean COVID-19 infection cases – but this sounds a bit far-fetched, given the spread is well within expectations from last week.
Current market conditions continue to be mostly about liquidity and investor capital flows – with near-term economic prospects looking sluggish. When market movements are dominated by liquidity flows, it tends to be related to asset bubbles. Bubbles are risky for investors because they eventually deflate, even if it may not feel that way when we are in the middle of one – most investors prefer to be part of a bubble when its inflating. At the same time, investors would like their active managers to use “timing” to get out at the right moment.
The Indian economy is going through a rough patch. That may sound odd to say about a country that has racked up high single-digit growth for a decade – and has now leapfrogged the UK to become the world’s fifth largest economy. But those impressive stats mask some growing pains. Ratings agency Moody’s estimates that India grew around 5% in 2019 and has now slashed its 2020 forecast to around the same figure – a marked decrease from the 6.6% predicted previously.
Of course, 5% GDP growth is not to be sniffed at. But given India’s status as a world-leading growth superstar, signs of deceleration are worrying. Government officials have acknowledged as much – though have suggested the green shoots of a recovery are already visible (something forecasters don’t yet agree with). Over the past two years, India has been subject to the many wider issues affecting emerging markets: trade tensions, a slowing of the Chinese powerhouse and a strong US dollar. But these issues have been coupled with what are ultimately self-induced problems.
Are trackers ‘killing’ the active management stars?
This year has already seen a flurry of mergers and acquisitions in the asset management industry. In the UK, following the Q4 2019 merger of Premier Asset Management and Miton, this week we learned Jupiter intends to buy Richard Buxton’s Merian. In the US, a much larger deal was announced with the friendly takeover approach of Legg Mason by Franklin Templeton, which will have combined assets under management of around $1.5tn.
Active managers have been swimming against the current for some time, as mounting regulatory burdens have increased costs, while passive investment funds have been chipping away at client bases. Low-cost index tracker funds are becoming increasingly popular, for several reasons.