Daily Commentary

MarketMinder’s View: We have seen much ado about deglobalization and protectionist policy lately, with many now (wrongly, in our view) sweating the Biden administration’s plans to increase tariffs on imported Chinese steel. But as we have written before, the global trade system is incredibly adaptive, and this piece showcases an illustrative example (which reminds us, this piece centers on a specific company, and MarketMinder doesn’t make individual security recommendations). “Man Wah is one of scores of Chinese companies to relocate to industrial parks in northern Mexico in recent years, to bring production closer to the US market. As well as saving on shipping, their final product is considered completely Mexican - meaning Chinese firms can avoid the US tariffs and sanctions imposed on Chinese goods amid the continuing trade war between the two countries.” This practice, called nearshoring, has become increasingly popular in recent years as the piece notes: “In just two months of this year, there were announcements of capital investment in Mexico of almost half of the annual total back in 2020.” That comparison is skewed by COVID disruptions, but the point stands. Nearshoring isn’t the only way around government trade barriers, either. Consider “transshipping” (i.e., reexporting from third-party countries), which has allowed US corporations to import Chinese goods through Vietnam while skirting 2018’s tariffs. Or Russia’s response to Western sanctions on its oil. Altogether, we see little evidence of an unraveling global trade system. Instead, multinational corporations continue finding solutions and loopholes to keep cross-border business activity robust, a reason government diktats don’t automatically hinder commerce.

MarketMinder’s View: Just a month after the Bank of Japan (BoJ) raised its benchmark interest rate for the first time in eight years, one survey found Japanese consumers are becoming more tolerant of rising prices and expect higher inflation ahead. “The survey showed for the third-year running that more than half of respondents would continue to buy a product at the same supermarket even if prices rose by 10% … Japanese households expect annual price growth of 5% over the next five years, marking the highest rate for eight straight quarters, the longest streak in data going back to 2006, according to a quarterly BOJ survey released on April 12.” The article argues this raises the likelihood of BoJ rate hikes, though we have some issues with this. For one, Japanese CPI slowed from January 2023’s 4.4% y/y high to 2.1% a year later as supply chains improved and energy prices eased (it has since ticked up to 2.7% as of March). Now, Japan is in a different situation than the US, UK and eurozone, because it maintained negative rates and long-term interest rate pegs, which are inherently contractionary, and a lot of its cost pressures come from the weak yen’s impact on imported prices—particularly imported energy prices. Higher rates might attract more capital to the yen, pushing its value up. But that is a maybe, and predicting any central bank’s policy is a fruitless endeavor. The BoJ’s Policy Board, which votes on monetary policy, consists of nine members, each with their own views and interpretation of data—making it near-impossible to predict central bankers’ decisions.

MarketMinder’s View: This piece mentions a few individual companies, so please note MarketMinder doesn’t make individual security recommendations. Those mentioned herein are coincident to highlighting a broader theme: The next big thing in investing won’t inevitably be a winner, even with government support. Take electric vehicles (EVs). In recent years, governments in the US, UK and elsewhere introduced tax credits and other incentives to encourage a broader shift to EVs. EV manufacturers cranked up production in response, anticipating surging consumer demand that hasn’t materialized. Now, electric automakers are having to sell at a discount to keep inventories in check. “Some 77pc of new electric vehicles (EVs) listed on Auto Trader were advertised at a discount last month, up from 55pc a year earlier, data from the company shows. The degree of discounting is also on the rise, with the average reduction now standing at a record 11pc.” This provides a useful lesson for investors: Government policies have no preset impact since they are just one of many variables impacting supply and demand. Sure, a tax credit may encourage some folks to purchase—but what about other key factors, including overall affordability, customer preferences and alternative options (e.g., hybrids). So the next time a government announces policy to help spur an industry, do your due diligence before rushing in and potentially chasing heat.