Global Markets to 13 May 2019
- The US Administration increases tariffs on US$200 billion worth of Chinese goods.
- The EU fears that President Trump may hit the auto industry with tariffs.
- Global equity markets initially fall on the news of higher tariffs, but then quickly rebound.
- Brexit talks continue, the EU elections are fast approaching and sterling looks vulnerable.
- Global equity markets remain vulnerable over the short term; but a bear market should be preventable, given the likelihood of an eventual tariff deal and a dovish US central bank.
- CEO Petronella West gears up to compete in the Sierra Leone marathon to raise money for Street Child.
Global Market Summary
US President Donald Trump’s decision to increase tariffs on US$200 billion worth of Chinese goods negatively impacted the global equity markets. A major sell-off was triggered by the White House’s decision to ratchet up tariffs from 10% to 25%, and a number of economists have already started to speculate on the level of economic damage that this move might cause over the coming months.
Should tariffs remain at these levels – and assuming that China will retaliate – it is thought that the US will lose around US$62 billion in GDP over the coming year. This would equate to approximately US$500 per household. Having increased the duties, President Trump went on to tweet that he saw no point in rushing to strike an agreement with China.
While Presidents Trump and Xi Jinping continue their sabre rattling and their exchange of tit-for-tat tariff messages, the fact still remains that nobody will win from trade protectionism. Indeed, there are real concerns that the trade war will escalate and that Washington will spread its tariff net over other regions such as Japan, Germany and the wider eurozone.
Since the global economy still needs support from government policy and accommodative central banks, the likelihood of a further hit to international trade would be highly disabling. A cursory look back over the events of last year provides evidence of the damage that can be done by trade disorders.
President Trump’s obsession with tariffs and President Xi Jinping’s commitment to ensuring that China’s economy remains prosperous seem to be creating a double-edged sword. Admittedly, for the US president, whether or not the tariff war is resolved could determine whether or not he secures a second term in the White House: a disastrous outcome could prove costly at the ballot box. The Chinese president’s mandate, on the other hand, is for life.
Although the global equity markets appear nervous about the ultimate outcome of the talks, they have a tendency to overreact; the last two trading days on Wall Street are evidence of this – US equities fell heavily before staging an impressive recovery by the close of business on Friday.
This was on the back of President Trump declaring that the trade talks with China would continue and that his relationship with President Xi remained very strong. Trump has no appetite for extreme market volatility or US businesses suffering from long-term values.
In Europe, the Brexit soap opera continues, with little prospect of any resolution in the short term. And as the end of the month looms, the main parties will start to shift their attention to the forthcoming EU elections. Labour leader Jeremy Corbyn has indicated that a second referendum could “heal” the nation and open up a clear path towards the future. Tory Brexiteers, on the other hand, are gearing up for a leadership challenge.
Despite decelerating global growth and the ongoing tariff tantrum in which the US and China are engaging, there remain a number of interesting opportunities within the equity markets. The developing world is undergoing rapid change, and the current macro-economic environment supports these markets.
Needless to say, rising costs in China and increased tensions with the US are putting pressure on company margins. But they are also creating opportunities elsewhere, such as the emerging markets of Asia and Latin America, where political demographics are shifting and new technologies are being enhanced. Away from the equity markets, there are also attractive options in emerging market debt, where local sovereign bonds look cheap, along with EM currencies.
Similarly, those with a higher appetite for risk and a long-term perspective might consider some of the frontier markets. Many of these will develop into the emerging markets of the future and will enjoy higher economic growth rates than those countries of the developed world. However, the overall investment risk that they present is significantly greater.
Emerging market investment is obviously not that old. It was in 1986 that the International Finance Corporation (a member of the World Bank Group) started promoting capital market development in these lesser developed countries. Governance, financial systems, safe custody services and accountability are all issues that should be taken into account when investing in the world’s exotic markets.
Many emerging and frontier markets have evolved since the 1980s and are now investable. But there are still many poorer nations that are heavily reliant on foreign aid and charitable donations to help them in their fight against poverty and support them on their path towards prosperity.
Sierra Leone, for example, is one of the world’s poorest countries. But it does have a mining industry and harbours minerals such as rutile, bauxite, iron and limonite, as well as diamonds and precious metals, such as gold. And while it exports these commodities, together with cocoa, coffee and fish to countries such as China, Belgium, Japan, Turkey, Holland and Indonesia, it also imports goods.
On the subject of foreign aid and charitable donations, Street Child of Sierra Leone is a UK-based charity that strives to reduce the number of children living on the streets, reintegrating them into their families and removing barriers to education so that these children can develop and prosper and eventually help to rebuild the country’s economy.
On 26 May 2019, Street Child will stage its annual marathon, an event designed to raise further funds to help this cause. Investment Quorum has supported this charity for many years (and intends to continue doing so for many years to come). Once again, it will be represented by our Chief Executive Officer Petronella West, who will be there with her daughter. If anyone would like more information about this event or indeed the charity, then please do not hesitate to contact Petronella. Anybody wishing to make a donation to this most worthwhile cause should click here.
Finally, the global economy has seen a long period of expansion, made up of many mini-cycles along the way which have affected investment returns. Recently, it has slowed down somewhat, under the threat of protectionism (trade wars), tighter monetary policies and falling purchasing manager indices, all of which have taken their toll.
There is a clear danger of further short-term downside risks. And with the old adage “sell in May and go away” foremost in everybody’s minds, further downward pressure on the markets over the coming weeks is likely, together with a tactical period for capital preservation over buying risk assets.
However, we still think that certain equity markets look appealing, and we have already mentioned emerging markets as a possible opportunity on any meaningful pullback. But more interesting are the opportunities being created by the current golden age of technological change that is sweeping across most geographical regions and sectors around the world.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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