"Global equities and bond yields are trending lower, and we maintain a relatively low-risk profile. But we're always assessing where we can go on the offensive, and in this post we walk through our thinking on some of these opportunities.
Hong Kong: Short Exposure
The protests that have dominated the summer news out of Hong Kong are on the mind of the market.
Large, peaceful protests are nothing new in Hong Kong, but today we're seeing a series of smaller, more disruptive stand-offs. There have been strikes and transportation disruptions, injuries, and arrests—though no reported casualties at this time.
For now, the competition is for the narrative around who's the aggressor—the protesters or the government (and the police by association). So far, the police force has been local, and has avoided lethal weapons. But the mainland has been stern in its warnings, and there are reports of military movement along the borders.
Even with the extradition bill that triggered the protests withdrawn for now, it appears that Hong Kong remains largely caught in a “muddle-through” situation of continued disruption. If the authorities give in too much to protesters' demands, they will risk affirming protesters' actions. On the other hand, if China cracks down, for example, it risks setting a precedent that could influence both trade negotiations and the forthcoming election in Taiwan in an unfavorable manner for China.
Stability is desirable anywhere, but particularly so in Hong Kong given the importance of its credibility as a financial center. We are maintaining our short equity and currency exposure there.
Argentina: No Exposure
We have seen turmoil in Argentina recently due to the progress of the opposition in the coming elections. It is mandatory to vote both in the general elections and the primaries. As a result, primaries serve as a kind of mock election, indicating what the election outcome would be if it were held that day.
The primaries recently took place, and the results disappointed the market. President Mauricio Macri, who heads the current government's ruling coalition, was unexpectedly trounced with just 32% of the vote. Meanwhile, 48% went to Alberto Fernández, whose running mate is the country's former president, Cristina Fernández de Kirchner. The polls were showing Macri falling behind by a much smaller margin.
We do not currently have any exposure in Argentina after selling a modest equity position in August 2018. At that time, the economy was looking increasingly shaky and inflation was running high. We believed this increased the risk of Macri losing this year's election and decided to stay on the sidelines.
While we are happy to have no exposure for now, Argentina is a market we are constantly monitoring. While difficult to navigate, these kinds of events could eventually present an opportunity as they can push prices away from fundamental value.
United States: Defensively Long
Finally, in the United States, we are long, but defensively so. One of the questions around the Trump administration's tariffs is, how much “cost” it is willing to place onto consumers.
Up to this point, the United States has focused tariffs against China in places where consumers were somewhat less impacted. The prior tariff lists focused on products where there were either alternative suppliers or the goods were less direct.
In mid-August, the United States delayed planned tariffs on many consumer goods until December 15. This delay could be a deal-making tactic, it could be to avoid affecting holiday shopping, or it could be a re-election strategy.
Nevertheless, it indicates that the Trump administration is aware of the cost of tariffs on consumer goods and the delay is a signal of how much risk they are willing to take at this moment. We continue to monitor the situation.
We have made several changes in our relative U.S. sector positions. Importantly, we have decreased our energy exposure as we do not see any major catalysts for higher oil prices in the near term. Potential conflicts in the Middle East seem unlikely for now to materially constrain oil supply. Meanwhile, the global uncertainty about economic growth may suppress oil demand.
Always Assessing
With these positions and others in place, we held up well during the most recent bout of market volatility. Our overall risk profile is relatively low, but we have risk positions in the portfolio that we believe will be adequately compensated. And beta is at or below our expected long-term average on a forward-looking basis.
As such, we have withstood some of the down moves, and we're always assessing where we can go on the offensive."
John Simmons, CFA, is a senior investment strategist on William Blair's Dynamic Allocation Strategies team.
Aaron Balsam, CFA, senior analyst, Lotta Moberg, Ph.D., CFA, analyst, and Ross Hambrick, CFA, analyst contributed to this article.
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