Investors are in the eye of the storm

-- | 17/09/2019

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Tim Murphy: We're here at the Morningstar Investment Strategy Day. And I'm pleased to be joined by our opening keynote speaker we heard from this morning, Michael Kelly from PineBridge Investments out of New York.

Michael, thanks for joining us.

Michael Kelly: Pleasure.

Murphy: So, there's lots of headlines about trade wars and what that means between the U.S. and China. How much do the trade wars affect some of these views?

Kelly: Well, the trade war has slowed us down. If the world, if you break it down into manufacturing, there's a narrow slice of the world that is under tremendous stress. It's in the eye of the storm. Now, we don't think that that stress is big enough to pull down the consumer, the much larger sector of the economy. It's very, very healthy, and very, very robust. So, we think this is serious, but seriously noise that will pass. As we move into the early portion of next year, manufacturing is underproducing retail, and we're going to run out of stuff and have to converge up. And so, that noise will pass and the political aspirations of the individual causing this trade angst will cause him to shift his focus to the domestic state of the economy in the United States early next year. And so, the ability to escalate trade tensions is in its very last inning. It's not over. But we're in the very end of that. So, we think stay focused on the bigger picture. We're more mid cycle than light cycle. Lot of time. Keep one's eye focused on the ball.

Murphy: Changing track a bit, you referenced the fourth industrial revolution during a discussion. Could you tell us a bit more about what that is, and what the investment opportunities are that that throws off?

Kelly: Sure. So, you know, many are saying we're in a fourth industrial revolution. So, every 50, 100 years, there's some game changing technology that ushers in a wave of productivity. This time, presumably, that's AI. And whenever you have a wave of productivity go through the economy, you tend to have very long cycles, sounds familiar; you tend to have inflation missing in action, sounds familiar. But you also tend to have a lot of disruption of business models. You have Unicorn sprout that no one saw coming. You have industries that were thought of as stable, predictable cash flow generators that collapsed overnight. So, what industrial revolutions can do is extend and lengthen cycles without an inflationary consequence. Sounds all great. But at the security selection level, it's very, very tricky. So, we're just saying that people need to – this is another reason to say the cycle is not as late as you think. But you do need to have an investment strategy of how to invest through a very disruptive environment at the micro level.

Murphy: Final one. You were very constructive on China, despite the trade wars we talked about earlier. So, talk to us about why you find attractive opportunities in China.

Kelly: Well, our enthusiasm does not relate to the SOEs in China. Under the last five years, the SOEs have really been favored inside China relative to the private sector. And it's gone a little bit too far and it's put too much stress on the private companies. And there's a big pivot going on inside China, where the resources of the country are now shifting back to support the private sector. So, if you own an equity portfolio focused on those companies, they've been facing a headwind, they're now going to be facing a tailwind. And we think that that's a much stronger force than these trade issues that we're seeing. And people are appropriately worried about will China and the U.S. trade less together? Yes, they will. At the same time, China is courting other partners, Russia, countries throughout Asia to trade more with and so as the United States who's courting the U.K., Japan, Mexico, Canada to trade more with. So, while I don't like that bifurcation of the world, the consequences, it's not a total loss of global trade, there are make-ups and that together is less powerful of a negative than the reallocation of resources to private companies. You invest in the private companies, not the SOEs, we think you're going to do tremendously well in the next several years in China.

This report appeared on 2020 Morningstar Australasia Pty Limited

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