‘Thinking: the talking of the soul with itself’ – Plato

Last week we referred to three T’s: Turkey, Tesla and turmoil.  Few of the issues around these three factors have gone away, but I would expect these three T’s collectively to make far fewer headlines over the upcoming week. So what should we all be focusing on in bigger picture matters? Well later this week the return of (currently) low level trade talks between the US and China as well as the annual global central bankers’ gathering at Jackson Hole will provide a variety of headlines. I doubt if they will be instantly as dramatic as various of the headlines seen over the past ten days but, if you put it all together, the world and its financial markets still has plenty of issues to sort out…and at the centre of all this are the global trade discussions.  The reason for this is everything else – from exchange rates, to commodity prices to emerging market angst, to  business and consumer confidence and hence job creation and economic growth – jumps off this.

With the corporate earnings season almost completely done both sides of the Atlantic, the final scores on the doors look superficially attractive, with a high proportion of both American and pan-European corporate names beating expectations.  I have talked before about the earnings season dance (which in short is beating lowered expectations) so I am not wholly surprised by such metrics.  However, if i had to highlight one theme from the hundreds of sets of numbers i must have reviewed, i would summarise it as follows:

More and more corporates felt the need to mention ongoing trade rhetoric and challenges or, in some cases, quantify the impact they anticipate on their specific business.  And on all conference calls there were many questions about these issues…and the reality is all corporates are waiting for guidance from both the talks and actions of government’s worldwide

Now this induces both a challenge and an opportunity.  The challenge aspect is fairly obvious: more trade angst leads to lower stock markets as individual companies progressively warn about the impact on their business, whilst generally the propensity for investors to pay big multiples for shares goes down. In this world share picks are more defensive, more dividend heavy and more truly opportunistic – if other investors panic too much and push individual shares around too much.  Meanwhile, beyond such stock picking opportunities, a broader opportunity for global investors comes with a lowering of trade fears possibly driven by a willingness of the United States administration to strike deals as the realites of early November’s upcoming midterm elections – which looks set to inhibit the flexibility of the Trump government – kick in.  With this scenario, opportunities in global markets that would benefit from a decline in the current King Dollar hegemony would come to the fore.

That is two very distinct scenarios.  This is why – aided by the relative dearth of new corporate earnings at the margin – the most important T’s this week are not captured by ‘Turkey’, ‘Tesla’, ‘Turmoil’ or even ‘Trade’…it is ‘Thinking Time’.  Or, to put it another way, finding new investment ideas where there is a reasonable opportunity for company management teams to relatively prosper under most scenarios through initiatives such as self-help and/or a compelling undervalued underlying theme.

More on this in the next couple of weeks.