Taking stock: EP Wealth exec discusses global stocks, de-dollarization
Editor’s note: Continuing our Spring Economic Forecast investor panel discussion, Taking Stock visited with Adam Phillips, the managing director of investments at EP Wealth Advisors, for this email exchange on May 9. These answers were lightly edited for content. To suggest future topics, email us at [email protected]
Q. Give me your thoughts about the investment climate in a “steady state” scenario where the level of White House disruption is limited, the trade war settles into extended negotiations, and we muddle through budget and debt limit debates.
The average time it takes to negotiate trade deals is around 1.5 years and then to implement those deals takes another large chunk of time. So, my base case is a longer negotiating period than what the administration is currently signaling. In terms of investing, starting points matter, and when you have an equity market that was already highly priced (in terms of PE) and had two +25% years in a row, any bad news was going to roil markets. Now we are more than a month into the trade war and valuations are again stretched back to that same starting point. So, while there is still volatility, with each successive month of the trade war, we are likely to see each incremental move provide less volatility. There are likely only incremental trade war moves from here, unless the administration calls the whole thing off.
Q. How about an environment where the current level of disruption continues and the trade war drama remains elevated, along with White House pressure on the Fed and the dollar remains under pressure.
I see the current level of disruption as the same as the steady state. There is only disruption with the trade war. Eventually, though, the current level of disruption becomes the new normal and no longer as disruptive. That does not mean that it will make it easier on companies to plan for how to survive the trade war. The dollar being under pressure is not exactly a bad outcome for the administration. They have been claiming that countries have been unfairly manipulating their currencies to keep the value low for years in order to make exports cheaper. So a weaker U.S. dollar is desirable in their book. What is bad is rising yields on Treasuries. That makes financing our debt more expensive and will get in the way of the stimulative policies that Republicans are planning.
Q. International stocks have been outperformers in the short term. Is this a sustainable trend? Why?
The short answer is yes. With the tariff situation not looking like it will be resolved (or rescinded) anytime soon, this can lead to companies doing less business in the US, and countries and companies not needing to hold as many dollars as before. This can contribute to a weakening U.S. Dollar vs other currencies as they repatriate their dollars and treasuries. A U.S. dollar that is falling in value vs international currencies can be a tailwind for the performance of international equities when priced in U.S. dollars. We have seen this story play itself out many times over the past 50 years. When the U.S. dollar is weakening, international companies in countries with appreciating currencies tend to outperform U.S. companies.
When you couple a falling U.S. dollar with loose fiscal and monetary policy in many developed international economies and tight fiscal and monetary policies in the U.S., we may wind up with greater demand creation abroad than domestically.
Q. Extra credit. Is the dollar hegemony over and what does this mean for investors?
I don’t believe that U.S. dollar hegemony is over, but the recent moves by the U.S. have most likely made the search for a new currency a little bit higher in the hierarchy of wants for many countries. We have been using our currency as a bit of a cudgel to get other countries in line with our way of thinking, and countries don’t like that. From a historical perspective, we have only seen one time where the world had a dominant currency (the U.K. Pound) that then fell out of favor. That was as much about the decline and fall of the U.K. as a global empire as it was about the emergence of the U.S. dollar. This position does not mean that our currency will be strong versus the rest of the world, but it takes time to shift the “normal” way of doing business. So we never like to extrapolate too much information from a sample set where n=1.
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