Geopolitical tensions continued to impact markets. New UK Prime Minister, Boris Johnson, materially ramped up the ‘no deal’ rhetoric to the detriment of Sterling and UK domestic assets. The US/China trade dispute rumbled on and looks increasingly unlikely to be resolved soon. Increased uncertainty around future US foreign policy objectives would appear to have been a contributory factor in the ongoing deterioration in relations between South Korea and Japan, its two major allies in the region. Further south in Asia, protests in Hong Kong continued much to the annoyance of Chinese authorities. Faced with mounting uncertainties and a slowing global economy, it was no surprise that the Federal Reserve responded by cutting interest rates. The prospect of policy-easing protected markets from the deteriorating outlook.
These factors continued to drive investors towards assets that offer apparent certainty in an uncertain world. As we have written many times before, while such a response is rational it has led to an extreme bifurcation in returns between ‘value’ and ‘growth’ stocks. Growth has now outperformed value for almost ten years. As value investors waiting for a reversal has made us sympathetic to the plight of the protagonists in Samuel Beckett’s play, Waiting for Godot. Of course, as growth managers may point out...Godot never does arrive. However, as tempting as it is to proclaim the demise of ‘value’ we think it is premature. Investment is inherently cyclical. In the last thirty years numerous asset classes or approaches have become ‘hot’ only to see their fortunes reverse. Investment can be likened to jazz, improvisation around a central theme. The overarching regime is key. The last ten years have been characterised by unconventional monetary policy and ever lower interest rates. Increasing inequality and populism, however, are likely to lead a socialisation of the stimulus with greater recourse to fiscal policy. Indeed, Boris Johnson has already stated his desire to put rocket boosters under the economy. Looser fiscal policy is even being seriously discussed in Germany as a potential response to the ongoing slowdown. Such an environment may see a pick-up in long-term inflation expectations and a better backdrop for value.