Political risks loom large over markets
The government is not your friend when it comes to investing — at least not lately. As I mentioned here last month, “manufactured money” designed to create near zero and negative interest rates across the world have made it increasingly difficult to earn a return on investments.
For years, political leaders have simply borrowed to pay for their overspending. Globally, government debt has ballooned to a record $66 trillion or 80 per cent of world GDP, according to a Fitch report published earlier this year. Now central banks have set interest rates to near zero or below, thereby allowing governments to avoid any immediate consequences of the excessive debt. However, zero interest rate policies simply reward government irresponsibility at the expense of savers.
Besides hurting savers and pension funds with microscopic yields, many of the developed world politicians are directly at war with various sectors of the economy. These assaults present another potential headwind to corporate profitability and therefore potential stock market gains. Higher taxes, regulatory costs and legal fees to fend off federal encroachment reduce shareholder returns.
In terms of taxes, the ongoing tit-for-tat trade wars add to the list of regressive policies. President Trump last month was absolutely joyous about slapping tariffs on Europe. Perhaps some people are not aware that tariffs are just another form of taxation which enriches governments at the expense of everyone else. Notwithstanding an announced “phase one” trade agreement between the US and China last week, tariffs continue to take a toll on the consumer. Strategists at JP Morgan concluded that tariffs already in place are costing the average American household approximately $1,000 per year.
Besides the inherent volatility of the current US administration led by Republicans, impediments to economic progress are building on the other side of the aisle. Leading Democratic Party hopeful, Elizabeth Warren has, in fact, made attacking business the centrepiece of her platform. Warren has railed against the banking industry, large technology companies, and is now going after healthcare providers and the pharmaceutical industry with relish. Meanwhile, another Democratic Party candidate, Bernie Sanders is hoping to increase taxes and would like to further pressure American energy companies, already this year’s weakest stock market sector.
Margaret Thatcher once said that socialism works until a country runs out of spending other people’s money. Clearly, socialist policies enlarge government at the expense of the private sector — typically through increased regulation, higher taxes and the nationalisation or break up of larger corporations. The White House recently took a swipe at Bernie Sanders and Elizabeth Warren’s “Medicare for All” plan by titling Trump’s healthcare executive order as “Protecting Medicare from Socialist Destruction”.
Meanwhile, economic indicators continue to point towards a slowing economy and weaker growth. Companies are pulling back spending as tariffs and trade uncertainty weigh on business decisions. Incoming International Monetary Fund managing director Kristalina Georgieva recently stated trade tensions had “substantially weakened” manufacturing and investment activity worldwide. She warned of a “synchronised global slowdown” at her inaugural speech this month.
Another item to watch for is regulation, or I should say overregulation. We had a recent experience in our firm, where a perfectly clean BMA audit resulted in an operational nightmare as the local regulator found it necessary to justify its existence by dredging up an archaic rule. Application of the new rule forced us to engage in a meaningless compliance task which now requires hundreds of man hours of additional time. Compounding the problem, the new initiative actually hurts our clients and impedes the effectiveness of our financial professionals.
Of course, this is not meant as criticism of such a hard-working team of bureaucrats, but merely making the point that unchecked government can be even more dangerous than unchecked business. Voters should be aware there are no free lunches.
On the positive side, innovative companies with flexible supply chains, or better yet, those less exposed to waning globalisation have a better chance of making forward progress in a softer economy.
This summer, I met with Glenn Fogel, CEO of Booking Holdings Inc, and Jason Gorevic, CEO of TelaDoc Health, at a conference in London. These two companies have been on the forefront of disruptive innovation in their respective industries and both have been bucking the trend of a slower macroeconomic environment. Their stocks have performed well, rising 87 per cent and 267 per cent, respectively over the past five years, well ahead of the S&P 500.
TelaDoc, a relatively young company, has been rapidly penetrating the healthcare services industry by delivering remote services utilising web-based technology. Telehealth can be as simple as a phone call with a doctor, but it may also involve online video conferencing with qualified doctors all over the world at much lower costs compared to traditional office visits. Healthcare providers save on average about $500 per visit according to Mr Gorevic. TelaDoc’s revenue grew 41 per cent in the latest half year, and the company’s total number of visits increased by 73 per cent to more than 1.9 million.
Booking Holdings Inc, a core holding in our Equity Growth Fund, has long been passionate about disrupting the traditional travel services business through online services. According to Mr Fogle only 35 per cent of global hotel bookings currently take place online with Booking websites accounting for about 10 per cent of the total. Presently, hundreds of billions of dollars in reservations are still taking place through other channels and this provides a runway for further growth. The percentage of online bookings is expected to grow from 28 per cent to 39 per cent by 2020. Booking is well-positioned to win a large share of this growing market with its portfolio of properties in different geographies.
As government continues to enrich itself at the expensive of investors and mainstream business, nimble innovators have a better chance of dodging the fiscal bullets lately arriving at machinegun speed.
Bryan Dooley, CFA is the senior portfolio manager and general manager of LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority
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