USFC April 2019 CIO Report.

Welcome to the April 2019 Investment Outlook provided by US Freedom Capital!

CONTINUED SLOWING OF US ECONOMIC GROWTH

The US economy is growing; however, the pace of growth is slowing. We are clearly shifting to the downside of the business cycle in 2019. Slowing rise and/or contraction should be the expectation going forward for most markets and companies. The shift in the business cycle is consistent with leading-indicator input and our forecasts.

The business-to-business sector is currently in a slowing growth trend. US Nondefense Capital Goods New Orders (ex aircraft) is up 5.3% year-over-year (down from 6.1% last month), a measure of business-to-business activity, and will rise at a slowing pace during the first half of this year before contracting through the remainder of 2019 and into early next year. We expect labor market conditions to remain tight during this time. US Private Sector Employment during the 12 months through March averaged 127.3 million employees, up 1.9% from the same period a year ago.

This shift to a slowing growth trend brings the US in line with many of the world’s other major economies. The World Industrial Production Index has been rising at a slowing pace since May 2018, and most developed nations are now moving along the back side of the business cycle. Europe Industrial Production has declined in recent months, and leading indicators suggest further contraction in the region is likely. China Industrial Production through February was up 5.9% from the prior year, nowhere near the double-digit growth rates reached earlier this decade. Southeast Asia as a whole has been in a slowing growth trend since late 2017.

While 2019 will be a year of business-cycle decline for the industrial sector, the nonresidential construction sector will likely be a source of growth in the economy. US Private Warehouse Construction, up 15.0%, is currently a particularly strong area of opportunity, and we expect this trend to persist throughout 2019.

FEDERAL GOVERNMENT POLITICS

Here in Texas (with zero personal and corporate state income tax rates), we are big believers in free enterprise and small government. That is, the government that governs least, governs best. While President Trump has stylistic issues, we strongly applauded the federal income tax cut from the December 2017 Tax Cuts and Jobs Act. Now that a year of data is in, the tax cuts have proven beneficial. This from an executive at a local manufacturing company:

• When reviewing our financial performance over the last few years, the outlook for the company has significantly improved, in large part due to the change in taxes. During the Obama administration, our effective total-taxes-paid rate was over 70 percent, and now under the Trump administration, our effective total-taxes-paid rate is about 50 percent.
• This has allowed us to hire more people, increase compensation, pay larger bonuses, purchase more manufacturing equipment and make more investments.
• For those people who say that lower taxes do not help small and growing businesses, they are completely mistaken. Small and fast-growing businesses need as much after-tax profits for expansion and investments as possible to continue to be successful.
• The fastest way to make people give up is seeing all their hard work and the results of their efforts redirected to wasteful and often counterproductive government spending and programs.

OUR ECONOMIC OUTLOOK (US)

This week, the Q1 GDP growth number of 3.2% grabbed the headlines today, with the Trump economy continuing to outperform expectations. Overall, economic reports appear roughly balanced when looking at the number of reports that exceeded consensus estimates and the number that trailed consensus estimates.

April consumer sentiment at 97.2 edged past consensus of 97.1 and rose from the March reading of 96.9. Better yet, the index of consumer expectations, at 87.4 vs consensus of 86.0, clearly means consumers are feeling pretty good about the future.

March durable goods of +2.7% came in a full two percentage points better than the estimate with core durable goods at +0.4% surpassing the estimate of +0.2%.

Continuous jobless claims came in lower than expected, indicating unemployment is still low. The 10-year economic expansion shows dramatically in the following chart from the Federal Reserve Bank of Dallas.

Our economic outlook remains unchanged: slowing growth, when it takes hold early this year, will persist through the first half of 2019. Activity will then decline into early 2020.

OUR INVESTMENT OUTLOOK (US)

We see US real estate continuing as a superior investment for our offshore investors, as this asset class is an incoming producing hedge against inflation and a hedge against the increasing volatility of the equities markets. Texas will continue to benefit from the fallout from the 2017 Tax Act, as companies in high tax states are faced with significantly higher local taxes in 2018 and beyond and many make the choice to relocate to states with low or zero state income taxes.

With continued job creation and in-bound migration, we continue to see for-lease apartment development to be an attractive investment target, although construction costs continue to be a major challenge in finding new development opportunities.

OUR APRIL ECONOMIC REVIEW (INDIA)

The month of April started with a monetary policy release from the Indian Central Bank. The Bank announced a reduction in benchmark interest rates by 0.25%, which was a second reduction in a row despite making claims that their stance was “neutral.” They also acknowledged a slowdown in Indian economic momentum by lowering GDP growth forecasts from 7.40% to 7.20% for FY 2019.

Another major data release, which highlighted a slowing economic environment, was Indian core sector growth, which takes into account eight core industries. Data for this sector showed that growth in February was an anemic 2.1%, only marginally better than 1.50% growth seen in January, a 19-month low. The Indian CPI, though, displayed a slight uptick to 2.86% for March up from 2.6% in February. This was primarily driven by higher food prices even as core inflation moderated slightly to 5.00%, a 16-month low.

Indian equities traded sideways for most of the month as initial euphoria of sustained global flows, owing to a dovish US Federal Reserve, was quickly substituted by renewed concerns on weak earnings growth and an overhang of global and Indian economic slowdown. Even as both the benchmark Nifty and Sensex briefly flirted with lifetime highs, the gains were ceded immediately as markets witnessed sustained selloffs over the last few days with rising crude being highlighted as a major macroeconomic concern. Foreign Institutional Investors (FII), however, continued their bullish overview on India with net inflows of $2.5 billion for the month (as on 25th April).

Indian bonds had a relatively weaker month as concerns on fiscal pressure due to weaker government revenue collections, and flaring crude prices kept investors away from the markets. Even as government sources signaled that the fiscal deficit for FY 2019 has been limited to its target level (3.30%), the fact that RBI may not conduct OMO buybacks in the near future lead to a steeper yield curve. FIIs flow also mirrored the above sentiment with net outflows of $0.5 billion for the month (as on 25th April).

Indian Equity Performance

The Indian rupee witnessed a weak month, depreciating by 1.5% against the US dollar primarily due to concerns over higher crude price. While Foreign Portfolio Investment (FPI) equity flows were robust, a weaker inflow into sovereign fixed income assets capped significant gains for the local currency. With further outflows expected in fixed income markets, it would be interesting to note whether FPIs continue their bullish view on Indian equities, which is facing significant earning headwinds. We expect INR to trade above the 70 handle in the near term.

Other Indicators

OUR MARKET OUTLOOK (INDIA)

In the near to medium term, we continue to remain bullish on US dollar investments primarily in the high grade fixed income space as we expect some economic slowdown in the global economy. India is no exception. We continue to view Indian equities being expensive relative to their forecasted earnings. Therefore, we recommend liquidating a part of this asset class and diversifying the same in a US dollar based investment option to reduce risk in your investment portfolio.

Our best wishes for your health and prosperity.

US FREEDOM CAPITAL

David E. Gunderson Chief Investment Officer	Arindam Sengupta Deputy Chief Investment Officer (India)