RECESSION
I heard few clear-cut predictions of a recession next year. But the word recurred repeatedly. To the risk of an economic recession in the U.S., add the risk of an earnings recession, and of recession in the eurozone. Almost no one believes this is a good time to buy cyclical assets. Discussions focus on defensive assets with recession-proof revenue streams, and on whether these are now too expensive. The hunt for yield is still on, a decade into the economic expansion.
While there are anxious discussions of the macro-economy, there is notably little belief that policymakers can do much about this. There appears to be an uneasy consensus that central banks have done more or less as much as they can. What happens next is in the lap of the gods, or consumers and industrialists making their decisions, or possibly even voters.
HUAWEI
There were startlingly few references to Europe or Japan. The only time I heard the word “Brexit” was in a self-deprecatory comment from an Englishman. But China is front and center. There appeared to be little deep belief that a trade truce would create much of a reason to buy stocks or other risk assets. Instead, there is a concern about the deeper source of the U.S.-China conflict, over the safeguarding of intellectual property, and the notion that China has stolen American ideas and jobs. Huawei Technologies Co., the telecom equipment manufacturer, is the poster child for the dispute over intellectual property. Buzz words like the risk of a “Silicon Curtain” to divide the world as the Iron Curtain once did are also floating around.
What can investors do to protect ourselves? Most seem to think the U.S. and China are likely to survive relatively unscathed. Investing in companies that will benefit from a likely increase in spending on IT in China was an interesting idea from UBS’s Tan, who also suggests looking for beneficiaries of supply chain resets, such as Vietnam and other parts of emerging Asia. I would add Mexico, which has an obvious logistical advantage.
THEMES
The best way to sell anything is to tell a story about it. The brain finds it easier to understand a concept if it is draped around a narrative or something visual, rather than numbers or abstractions. Narrative Economics, the latest book by Nobel laureate economist Robert Shiller, delves into the importance of stories in explaining market phenomena.
Thematic investing, or the idea of looking for some big social narrative and then finding investments that will do well as a result, has been around for a while, but it is growing ever more important. This year, there seems to be more emphasis on spinning tales that could help to illustrate what is about to happen.