Market Commentary – 11th July 2018

England may win the World Cup; however, we cannot ignore the trade wars…

Despite the prospects of a global trade war, we think that the world economy will gain a bit more momentum over the rest of this year. GDP growth in the US should rebound as tax cuts and a strong labour market boost consumption, allowing the federal reserve to raise rates another four times by mid-2019. This is, however likely to keep global equity markets under pressure. Next year, we expect global growth to slow as the US and Chinese economies lose momentum.

Like the World Cup, the near-term outlook for the world economy is bright, despite the recent escalation in trade tensions. Inflation is likely to trend towards 2% over the next few years in most major economies but to do so at different rates. This is a key reason why economists expect the US Fed and ECB interest rate differentials to widen until mid-2019. Further ahead, however, with monetary tightening set to take a toll on the US economy next year and China losing momentum, global growth is set to slow in 2019-2020.

Investors’ worries over an escalating tit-for-tat trade war between the US and China are looking more stubborn to go away with the latest move from Washington serving to ratchet up tensions once more. It’s been several months since this theme first appeared, and there is little sign of it ending anytime soon with both parties seemingly not willing to back down. With the China’s leading stocks in bear market territory it is clearly weighing on investor appetite in the far east and the US equivalents look vulnerable to some downside going forward given their recent strong run with the Nasdaq ending Tuesday not far from record territory before the latest measures were announced. It is expected that when the US markets open this afternoon, investors are expected to react to the conspiracies over trade tariffs between China and the US.

What are the trade wars?

The tariffs Trump has imposed on China has come as a surprise which is now escalating the trade wars. The US listed $200bn worth of additional products it intends to place tariffs on as soon as September. The move came just days after the two countries imposed tit-for-tat tariffs of $34bn on each other’s’ goods. Yes, you are right in thinking that this could hurt global trade as the costs rise.

China says it will respond to the new tariffs that President Trump has asked his administration to prepare. But how? It cannot directly match the total of $234bn worth of goods that the US has in its sights, because it does not import enough American goods (another fact which the US president complains about). Last year, US goods exports to China were worth $130bn. What Beijing could do instead is to make life more difficult for American business interests, with more aggressive action by regulators, such as safety inspections or financial investigations. China could also try to force its currency lower to gain competitiveness. There has even been speculation that China could sell some of the $1 trillion worth of US government debt (or bonds) that it holds. If it sold enough, that could drive up the cost of borrowing in the US, but it would also inflict losses on China, by forcing down the value of those bonds.

The economic data in this case is absolutely key when understanding the strength of global economy and what is important to note that it is positive, and the growth seems to be flattening. The nature of the boom and bust cycle is that this is expected to slow down in 2019 and 2020. Boosted by governments demand side policies, GDP growth is set to rebound sharply over the rest of this year, allowing the Federal Reserve to continue gradually hiking interest rates. By the middle of next year, however, with the stimulus from governments fading away and cumulative monetary tightening beginning to bite, we expect that economic growth will slow sharply and force the Federal Reserve to cut rates in 2020. With the escalation of trade wars, this could potentially worsen any downturn and add to the inflationary pressures already being built throughout the economy.

What’s going on with the UK and its relentless political issues?

Despite the strong economic data, we have received at the beginning of this month, the economy is struggling on its political face as we try negotiating our way out of Europe. This is a shame because the UK economy is still so resilient, despite the political pressures its facing. It does pose the question, where would we be if we didn’t have a referendum? More in line with the US?

Europe isn’t making the transition out of the European Union easy for us, and it has started to look like a more personal matter, rather than a smooth transition for the people of the European Union. Theresa May is not necessarily doing a very good job at leading these negotiations with David Davis who resigned from the negotiations and later Boris Johnson. UK firms are now looking for direction and adding to the pressures the UK prime Minister is under, by stating that Brexit isn’t just a British or European problem. Brexit could turn out to be tough for the British people because of its impact on British growth: if there is going to be less growth in the UK, this will have an impact on global growth, and so Brexit could hurt everybody a bit, if the correct decisions aren’t made by the Prime Minister. We still do not fully understand what Brexit will entail and how it is defined. Its economic effects and how they will play out are very important decisions the Prime Minister must address soon. It seems that the British people have lost hope in her, but we still have hope.

For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.

Model Portfolios & Indices

Over the last week we have seen most of the indices that we track increase from the basis of a drop in recent weeks over the trade wars. This week, optimism has been high which has enabled the value of the indices to increase. From the Money Flow Index (MFI) barometer we use in the attached economics pack, it is apparent that market participants have increased over the past few days which would indicate that the rebound is taking place from Trump’s actions on trade wars with China. With our model portfolios, these have done relatively well over the past week capturing the upside of the equity market upswing as well as protecting from the downside when the markets do see a correction based on the equity and non-equity mandate that we have adopted in the model portfolios. The models are currently skewed towards a normalised approach and based on the economic data slowing down, we will start de-risking the portfolios.

With the fund managers we employ in the model portfolios, their mandates are centred around strong conviction in their asset selection. We expect the markets to remain in cautious territory throughout 2018 with high volatility based on various political risks, however the economic fundamentals will pick up these valuations and improve investors sentiment giving them a reason to remain invested and therefore not trading the noise in the markets.

Important Information

The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.

This Day in History

With the theme of this scorching heat, on this day in 1913, the hottest temperature was recorded on Earth. It reached 134 degrees Fahrenheit at Furnace Creek, Death Valley National Park. Let’s hope it doesn’t ever get that hot over here otherwise I’m sure Argos will run out of air conditioning units and fans. However, good for ice-cream business!!!

We hope you enjoy the football tonight and as always have a wonderful week and stay safe.

VBW

Jason