In March our headline was “Trump, Italy, and Putin raise temperature”. Plus ça change.
Donald Trump raises most people’s temperature most days. In recent 6 monthly client reports we highlighted the growing risk of cyber wars emanating from Russia (or Iran). And Italy is back in the headlines too – more on that in a moment.
The main UK market and smaller company indices have hit new highs in recent weeks, despite on/off trade wars, on/off Korean nuclear threat, and the on/off threat of Exitalia…
…which neatly links to the second anniversary of the Brexit vote later in June. If the UK was going to hell in a handcart it isn’t showing up in markets. The average smaller companies fund (very exposed to the domestic economy) is up more than 25% in each of the last two years (54% in total), outperforming the mainstream UK and US markets (still up a respectable 37%). Inflation was going to take off to punish the Brits – in fact index-linked gilts are barely up 10% in total over the period.
Clearly the world has bigger fish to fry than to fret over the UK’s little local difficulty. Italy, and the risk of Exitalia, is not interesting because it provides another chance to make a (tiresome) political point. It is interesting because it highlights the consequences of the ongoing darkening social mood amongst the Western populations, a trend which precedes the 2008 banking collapse which many are inclined to blame for all woes.
You might have spotted that Argentina has come under severe pressure in 2018, and in desperation called on the help of the IMF. Yet troubled Argentina has a debt to GDP ratio of (only) 53%. In stark contrast Italy has a debt to GDP ratio of 130% and it’s likely heading up, a lot.
Italy is important. Not only is it the third largest country in the eurozone but also the 13th biggest in the world. It is more than 7 times bigger than Greece (59th in world economy rankings), whose debt problems seemed to threaten not just the eurozone earlier this decade but also the world banking system (which had only just begun to recover from the collapse of Lehman’s in 2008, which in turn was derived from too much debt).
It doesn’t feel like this one will implode soon (assuming it might at all). As you have seen, the Italian establishment have already tried to blocked the
will of the people populist government. That it is likely to make more Italian voters more angry if there is another election in the Autumn. Importantly for some, it also gives “Brussels” the chance to prepare for the battle that surely lies ahead. As one ex-IMF official put it, “Italy is too big to save, and too big to fail”.
In a funny way these global events serve to highlight that plucky Blighty might not be such a bad place to be invested.
Beyond Korean nuclear troubles, Asia isn’t in bad shape either.
For example, the world’s best dividend growers in the last years were South Korea, followed by Indonesia and India. Indian operations of Tata Motors (who own Jaguar Land Rover) have enjoyed a sales increase of 45% in the most recent quarter. In China, Tencent (the 5th biggest company in the world) enjoyed sales up 48% in the first quarter compared to a year ago.
The scale of the latter numbers serves to highlight the continuing long term potential in Asia, whatever the shorter term shenanigans for markets. But those shenanigans remain our day to day focus, and will undoubtedly be a big feature in the next edition of the TopFunds Guide, later in July.