You have to kill the chicken to scare the monkey

The global turmoil we have experienced for the first half of this year reminds us of this famous Chinese proverb.  Like many proverbs it is hard to translate but it means something like a measure of fear is necessary at times in order to bring bigger things in line.  To us it more aptly describes the confusion which has grown immeasurably across the political landscape.

The events of the first half of the year have served to remind us once again that, as long-term investors, the best we can do is to focus on the fundamentals.

Our basic view is still what we thought at the beginning of the year.  We see a robust global economy that is delivering growth, employment and rising incomes in most major economies, whether it is the US, Europe, China or other emerging markets.  This growth is moderate but sustained and does not look like it is excessive or giving rise to higher inflation.

The risks we see are twofold:  political risk, with politicians in different countries pursuing policies that are more confrontational and adversarial than we have seen for a long time, and economic risk as a consequence of political risk (like trade wars) and policy errors by central banks (like unnecessary rate rises in the face of an inverting US yield curve as you highlighted in your note to me last month).

On the first, political risks are real but all we can really do is focus on quality and value as we do and believe that it is in politicians’ interest to deliver growth and prosperity and that much of what we are seeing has to do with posturing and populism.The trade wars are the key global issue today but there are others. On the second, we will have to see if the political issues spill over into the real economy in terms of lower growth, higher inflation or lower investment.We think it is less likely that we will see policy errors in the US and in Europe because we do not think it can be in the Fed’s or the ECB’s interest to imperil economic growth at a time of such political uncertainty, with mid-term elections coming up in the US and Brexit and immigration causing tensions in the EU.

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