Quarterly Update

Oct. 2018

Garrett R. D'Alessandro, Chief Executive Officer | Oct. 2018

From the Desk of Garrett R. D’Alessandro, CFA, CAIA, AIF®

We cannot recall a time in the four decades since the normalization of relations between the U.S. and China when the two superpowers were so antagonistic.

Trade War, Cyber War, Industrial Policy War...

…All with China. We cannot recall a time in the four decades since the normalization of relations between the U.S. and China when the two superpowers were so antagonistic. The forces driving the current three wars have been fomenting for years. Trade tariffs are unlikely to resolve what is really an ideological difference between the two superpowers. China’s desire to become a technological and industrial hegemon, as expressed in their “Made in China 2025” policy, is surely their right. But the methods they are using in attempting to achieve hegemon status have generated most of the issues driving the U.S. and China apart.

Acquiring the status of global technology and industrial leader requires that China take its collective business and technology intelligence to a much higher level. China is pursuing that goal with highly aggressive sovereign behaviors that are at odds with Western moral, ethical, and business principles. While the U.S. cannot dictate another country’s actions, we have no choice but to combat China when its behaviors on trade, cyber-attacks, and industrial espionage violate agreed-upon fair trade rules.

Tariffs are only one approach, and not a terribly effective one. They will hurt consumers, harm businesses, and not achieve substantive change in Chinese behaviors where we think it really matters. A more comprehensive effort at the policy level is needed. Significantly reducing business by and between the U.S. and China is not the answer.

We think unfair trade is a justifiable battle, but the U.S. should tackle more than the trade deficit with China. We would also like to see efforts to stop the theft of intellectual property. Technological and industrial competition will define which country enjoys the best of the next few decades’ economic growth. The behaviors of the two superpowers are not aligned, and this is an issue that cannot be ignored.

We expect that the trade war will impact U.S. GDP growth by causing consumer goods prices to rise and companies’ export revenues to decline. The full impact in 2019 is projected to be about 0.6% of total GDP. This is not insignificant, but not so consequential as to cause a premature end to the economic expansion.

Our research team has already done some portfolio repositioning to reflect adverse earnings consequences on companies impacted by the trade war. Our asset allocation committee is taking the economic impacts of the trade war fully into account when setting our tactical asset allocation. These impacts will be noticeable, but at this time we still believe the U.S. economy will continue to expand well into 2019.

We cannot recall a time in the four decades since the normalization of relations between the U.S. and China when the two superpowers were so antagonistic.

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The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

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Investments in emerging market bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

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