Jefferies Research analyst Laban Yu, in a research report both fascinating and academically rigorous, argued that the stakes in the current diplomatic spat between the U.S. and China go far beyond trade.
“China can only conclude that the U.S. is in long-term decline as President [Donald] Trump actively undermines the liberal international order with his tariffs on allies as well as adversaries, contempt for multilateral institutions and belligerent tweets … [China is] betting on American political decay … We believe China will test America’s pain threshold with the belief that U.S. politicians are beholden to interest groups (farmers, retail industry, corporations).”
Mr. Yu sees the economic pain from an extended trade war as more or less evenly distributed, with the two-sided imposition of tariffs “not punches thrown at the other boxer but head butts which hurt both sides equally.”
Citi economist Willem Buiter described similar concerns about U.S. politics in “How to Think about Political Risk and the Economy,”
“Policy uncertainty affecting trade, sanctions, regulation, diplomatic norms, and the strength and independence of institutions is the greater risk going forward. The obstacles to appropriate countercyclical [stimulative] policy when global recession threatens are likely to stem from weak political capacity and will, owing to political fragmentation.”
In May 2018, I wrote “Don’t trust government? You’re threatening the economy,” which discussed similar issues – the fundamental importance of trustworthy political, educational, cultural and health-related institutions in facilitating economic growth and the general functioning of society. That column drew heavily on the work of MIT professor Daron Acemoglu and University of California Berkeley’s James Robinson, authors of Why Nations Fail: The Origins of Power, Prosperity and Poverty.
There were signs of institutional failure when the column came out almost a year ago – political extremism, pathetically low approval ratings for U.S. congress, and an anti-vaccination movement that showed disdain for medical experts – but there was no clear battleground to test the relative strength of western democracies.
Trade negotiations might be providing the arena that was missing. A deal that cools tensions could, of course, be signed at any point but Mr. Yu believes, “Even if a deal is signed next week, it is now clear to us that the China-U.S. relationship will be fraught for decades to come.”
–Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
BSR Real Estate Investment Trust (HOM-U–T). This REIT has an attractive 5.2 per cent yield and conservative payout ratio. This small-cap REIT with a market capitalization of US$161-million is well covered by the Street. The REIT trades at a reasonable valuation, a discount to its peers, and has 10 buy recommendations. Yet, the unit price is relatively unchanged from where it was trading last year. Jennifer Dowty reports (for subscribers).
Algonquin Power & Utilities Corp. (AQN-T). With the constant drumbeat of unsettling financial news, it’s easy for investors to become fixated on short-term events. Will the U.S.-China trade war derail the bull market? Will interest rates rise? Have corporate profits peaked? A less stressful – and more profitable – approach is to buy solid companies and hold them through good times and bad. Case in point: Algonquin Power & Utilities. The stock’s performance offers an excellent illustration of how time, dividend growth and compounding – not trading in and out based on headlines – are an investor’s most potent weapons. John Heinzl explains (for subscribers).
Don’t count on Donald Trump saving the stock market
Donald Trump, who has often pointed to a rising stock market as evidence of his economic prowess, is now willing to put Wall Street at risk if it means winning over Main Street. Investors should pay attention to this shift in priorities. Anyone counting on the White House to rush to the aid of share prices after the market swoon on Monday is likely to be disappointed. “There are no economic levers left to pull,” said Joel Naroff of Naroff Economic Advisors in Holland, Pa. Ian McGugan explains (for subscribers).
These are the numbers that demand you diversify your investments globally
The Canadian stock market is what it is – old-school sectors, such as financials and resources, rule, while new economy sectors, like health care and tech, are nearly insignificant. This is what passes for big change in the S&P/TSX Composite Index – industrials have edged past materials to become the third-largest sector, after financials and energy. Industrials stood at 11.2 per cent in mid-May, and materials at 9.9 per cent. Add up financials, energy and the materials sector and you still get 60 per cent of the index. Health care was at 2.2 per cent, tech at 4.8 per cent. Our market is not keeping up with what’s happening globally. Rob Carrick explains why this means diversification is key.
Forget stocks, the slowing global economy makes bonds the better bet over the next year
Bonds are a better bet than stocks over the next year, according to a widely followed U.K. economics forecasting firm. The S&P 500 and other stock markets are likely to lose ground in coming months as they grapple with stubbornly slow global growth, according to London-based Capital Economics, which hosted a conference in Toronto on Tuesday. But bond prices, which move in the opposite direction to interest rates, should benefit as central banks, including the Bank of Canada, cut rates to support sputtering expansions. Ian McGugan reports.
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Ask Globe Investor
Question: I was wondering if you have any thoughts on the relatively recent trend on the “plant-based meat substitute” industry? Any Canadian or U.S. based names that you would recommend? Or an ETF, if one exists?
Answer: The timing of your question was certainly bang-on. On May 2, meat-substitute producer Beyond Meat Inc. (BYND-Q) launched its initial public offering on Nasdaq at US$25 a share. At one point around 2 p.m., the shares had almost tripled in value at US$72.85. They finally finished the first day of trading at US$65.75, a gain of 163 per cent on the day, with more than 22 million shares changing hands – this for a firm that lost almost US$30-million last year, and which has warned it may never make a profit.
The stock rose as high as US$85.45 before reality set in and the shares pulled back to the mid-US$60s.
What this tells us is that investors think meat-substitutes made with plant products like peas and soy are the next big food craze. The problem is that there are not many investment opportunities yet. The only other major company exclusively devoted to plant-based eats is California-based Impossible Foods, which is privately owned, at least to this point. There are no exchange-traded funds (ETFs) specializing in this field that I’m aware of. The Vegan Climate ETF is supposed to start trading in New York this year, but it hasn’t launched yet.
However, some major meat producers are hedging their bets and getting into the plant area. In early April, Maple Leaf Foods (MFI-T) announced it will build a US$310-million plant-based protein food processing facility in Shelbyville, Ind. At 230,000 square feet, the company says this will be the largest facility of its kind in North America.
If you want to invest in the meat substitute business, Maple Leaf looks like a good compromise choice. It’s an established company and the shares pay a dividend. Beyond Meat may be hugely successful at some point but at this stage and price it is pure speculation.
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Compiled by Gillian Livingston