JANA places significant value on our research programme. This includes encouraging and supporting our consultants to spend focused research time visiting the best and brightest global investors in their offices in order to glean valuable investment insights for the benefit of our clients.

One such recent research trip was carried out by Matthew Gadsden, Senior Consultant and Head of JANA’s Global Equities Research Team, and Greg Wilkinson, Senior Consultant, for three weeks commencing in late October 2018. During this trip Matt and Greg visited in excess of 45 global equity managers in Denmark, London and the US cities of New York, Stamford, Boston, Washington DC and Denver. They were joined by John Coombe, Principal Consultant, for some manager meetings in London and New York. The purpose of the research trip was:

1. To meet new global small and mid-cap managers to expand JANA’s knowledge base and assess whether there are any such managers of special interest we should extend our due diligence with;
2. To meet managers who already manage our clients’ money. While JANA meets these managers on a regular basis both in Australia and via telephone discussions, it can be insightful to meet in their own offices as, inter alia, it provides an opportunity to get to know staff who do not typically travel to Australia; and
3. Most importantly, to garner and feedback insights for the benefit of our clients’ portfolios.

Key themes

While a number of idiosyncratic issues emerged during the trip, some key common themes included the following:

• Capital city construction continues to boom in the UK and US;
• Company fundamentals (earnings, margins) appear to have peaked and, without continued stimulus measures (e.g. tax cuts, low interest rates), their outlook may be challenged due to rising costs and slowing growth;
• The potential impact of trade tensions has been underappreciated by the market. It is possible it may get worse and may persist for some time;
• Investment opportunities appear to be very much stock-specific;
• While there do appear to be pockets of value, managers are in general being cautious due to the uncertain outlook; and
• Emerging markets, in particular in Asia (including China), increasingly appear to offer relative value.

In several meetings we asked managers what “keeps them up at night from an investment perspective”. The following were a few of the key responses which provides some food for thought (note the relatively frequent response of ‘geopolitics’).

Understandably geopolitics, and more pertinently global trade tension, is a common theme in investment markets. With the help of T. Rowe Price Matt and Greg met with the Former Assistant Secretary of Commerce for Enforcement at the United States Department Of Commerce, Paul Piquado, to discuss considerations around the US / China trade dynamic. The most noteworthy points included:

• The China trade tensions have been building for 17 years – ever since China entered the WTO. The bet the West made, that China would reform after joining WTO, has failed spectacularly – there has been a “complete breakdown in trust”;
• If elected the Democrats would also have had to do something about China – this is not just a Trump presidency focus (although Clinton may have approached it more subtlety);
• Negotiating with China is like the Bill Murray movie Groundhog Day – nothing changes, no progress is made, China delays;
• People in the trade department in the Trump administration are exceptional and very experienced in trade enforcement;
• It is difficult to identify a “Trump” master plan, however, a key principle is US companies being able to compete on the same terms as Chinese companies in China;
• Prospects for the next US election? No one ever lost an election by being tough on trade. Don’t underestimate the power of incumbency;
• The longer trade measures are imposed, the harder it is to remove them – they gain a life of their own; and
• Trump and his advisers firmly believe the US has the upper hand – and now is the best time to act (while there is good US economic growth).

In summary: Trade implications are likely to get worse in the short term and trade rhetoric is likely to continue for some time.

Please contact your JANA consultant should you wish to consider the contents of this note further.