Trade Wars
Throughout 2019 the rhetoric between the US and China has become more hard line. On the face of it an impasse in trade talks leads to increased tariffs and slower economic growth as the Chinese have decided to take a firmer line in negotiations, reducing the chances of a deal.
At some stage the uncertainty is likely to knock consumer spending, leading to lower global growth, although possibly not a full-blown recession.
Logically, it is in both countries’ interests to reach an agreement. Trump needs a stronger economy ahead of the 2020 election. President Xi Jinping needs the strong economic growth for stability in China, lifting people out of poverty and providing jobs for the young.
More recently, however, all the signs are that an impasse is likely that would cause a further deterioration in the economic outlook, despite a partial deal being agreed with the suspension of one set of impending tariffs, but the planned tariffs for December remaining in place.
Global Interest Rates & the effect on Stock-markets
Global Economies sit on a ‘ridge’. Central banks are delicately balancing the economies between, on the one side, much stronger growth driven by low interest rates and Quantitative Easing (QE) and, on the other, a deteriorating economic environment, low inflation, maybe even deflation.
For the past 10 years, we have been balancing, worried at different times about on one side ‘excessive growth’, or on the other; ‘low growth’. Now, central bankers fear ‘low growth’ most of all. That explains 2019’s biggest turnaround in financial markets: the U-turn in expectations for US interest rates as the expected rises of 2019 did not materialise and were replaced with two 0.25% cuts to rates, reducing them to a range of 1.75% to 2.0%. The median forecast is that rate cuts will remain at that level until the end of 2020,
Furthermore, the cost of money is falling across the globe, with the European Central Bank (ECB) even cutting its deposit rate to a record low of minus 0.5% and announcing the resumption of QE from 1 November 2019.
Equity markets initially responded with euphoria to the reversal in rate expectations, although there was some disappointment following the July cut when the Federal Reserve described it as a “mid-cycle adjustment to policy” rather than the beginning of a more aggressive cycle of monetary easing. Investors were incredibly nervous at the end of 2018, as markets fell about 20% from September 2018 highs to their lows on Christmas Day. Then markets started to rally, and now they are around or even above their previous highs.
The key question is ‘’will the falling cost of money succeed in supporting economic growth?’’ For now, the jury is still out. Consumption has held up well, especially in the US, as employment has held steady. On the other hand, investment spending and indicators of manufacturing activity have declined in recent months.
In the US and in Germany the most forward-looking indicator of business expectations is at levels not seen since 2009, which suggests a recovery is around the corner. Quite possibly, the weak manufacturing indicators result from uncertainty over the future terms of trade, or tariffs. Until the US-China trade talks reach a conclusion, it’s hard for manufacturers selling into the US to decide whether to have a manufacturing base in China, Thailand or, indeed, the US.
Brexit
The UK’s chaotic Brexit negotiations, with the chances of no deal remaining high ahead of the October 31, 2019 deadline for leaving the EU, compounds the uncertainty in the UK and Europe. The obvious response is for companies to delay any investments in production. This could well be what is behind the lower manufacturing indicators. One of the biggest difficulties in leaving the European Union without a deal is the potential disruption to supply chains. The loser is likely to be manufacturing in the UK, as the car manufacturers have stated it would close UK plants if Brexit rendered them unprofitable.
Therefore, if business sentiment and investment remain low for long enough, the inevitable result is lower employment, which triggers falls in consumption. This has not happened yet and therefore; will growth expectations decline to the degree that they trump low interest rates? If so, then equities look vulnerable at today’s levels. However, if interest rate reductions successfully support growth, then equities could still rise.
So much hinges on the trade talks. It is difficult to predict the respective strategies of President Trump and President Xi Jinping as they are both strong leaders. Since the talks broke down in May, they seem less likely to countenance the compromises needed to reach agreement, so challenging the resolution of their trade differences and even the continued progress of globalisation. Failure to strike a compromise over tariffs threatens to reduce global growth still further, and even stand in the way of globalisation.
Therefore, whilst it seems likely that global growth will remain slow, monetary easing has reduced the chances of recession. So as the risks of a protracted slowdown have risen, even with the prospect of lower rates, we should remain cautious about equity prices.
As always, we would encourage investors not to over-react. Share prices will fall and rise and it’s important not to be ‘out of the market’ at the wrong time as this can be costly to your overall capital values. We believe investors should remain focused on the medium to long term, investing over ‘time’, rather than trying to ‘time the market’. We will continue to work with you and manage your financial plan and provide the best potential to mitigate volatility by diversifying investments suitably across a broad range of asset classes that include equities, commercial property funds, fixed interest securities (bonds) and cash. We will always look to tailor your assets to your attitude to risk and capacity for loss, whilst considering what the impact the current stage in the economic cycle has on your exposure to various assets.
For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email [email protected]
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