Matt McLennan reflects on his first decade managing First Eagle's Global Value team, and the challenges and potential rewards of value investing. See what excites him about the next 10 years.
As we look to the second half of the year, global growth has become somewhat asynchronous. Europe is decelerating, while emerging markets, particularly Latin America, are struggling with a strong US dollar. As to China, the trajectory of its growth is debatable.
China’s currency slipped, as well, but at quarter’s end it was still overvalued, in our view. For most of the last 20 years, China’s cheap currency facilitated very large trade surpluses and the accumulation of extensive dollar reserves. More recently, the overvalued yuan has put pressure on China’s export growth— pressure that will only ratchet up with the introduction of tariffs in the United States.
In the geopolitical sphere, we saw further departures from democratic traditions and a continuing drift toward “strongman” politics in several countries. The leading candidate in Brazil’s upcoming election is currently in jail. Turkey’s president assumed new powers. And as we noted in the first quarter, China’s president removed his own term limits.
As we have said in the past, our approach is to reduce our exposure to risks for which we are not being adequately compensated. Our defense against credit risk is to emphasize investments of relatively higher credit quality. Although we cannot entirely avoid duration risk, we can potentially minimize the risk by buying shorter maturity paper.