Risk assets globally are hanging on to the good gains made on a year-to-date basis. While there may be growing concerns over the growth outlook for the world economy, Central Banks are on easing mode, albeit reluctantly, helping to allay some of the worst fears of recession.
Trade wars – the “new” new normal
US policy towards China has changed for good. The current set of tariffs and ongoing negotiations are ultimately driven by US fear of rising Chinese trade and technological prowess. There are signs that the worst excesses of a tariff war will be avoided, although it’s reasonable to expect a new order of more restricted trade than before. The likely impact of which is a re-shape of the regional patterns of trade, rather than overall volume or value. China (and more widely Asia) are pivoting towards a re-alignment of production supply lines.
Currency wars – part of the broader strategy
As part of the broader attempt at global containment of Chinese aspirations, and with the Trump administration formally labelling China as a currency manipulator, the prospect of ‘currency wars’ overtaking ‘trade wars’ as a familiar headline is increasingly likely. Tweets from President Trump suggest a potential intention to devalue the Dollar and analysts are also interpreting the Swiss National Bank’s recent intervention in the currency market to weaken the Swiss Franc as another sign of potential currency wars. Such actions have a very questionable track record of success. It’s hard to pull off successful competitive devaluations, and equally difficult to effectively sanction another nation for their currency management policy. The irony is the fact that China, until recently, was looking to avoid excess weakness in its currency, in contrast to Mr Trump’s claims.
Central Banks – clearly accommodative
The view from Central Banks is clear – rates are heading lower. New ECB president Christine Lagarde recently noted that she didn’t believe the ECB had hit the effective lower bound on policy rates. The Federal Reserve’s quarter point-cut at the end of July, the first since 2008, was met with some disappointment in that it amounted to just a “mid-term policy adjustment”. The market is certainly expecting more cuts by the end of the year.
Brexit – prorogue, but no progress
Continued political division in the UK makes it difficult for financial markets to be certain about any one possible Brexit, or general election, outcome. Against this backdrop Sterling and Sterling assets are undervalued. Any clarity could potentially trigger a recovery in UK assets, which seem to have priced in quite a negative scenario. The months ahead could see the currency trading in a wide range between 1.10 and 1.35 versus the USD.
Bonds – deeper into negative territory
Government bonds have been in high demand. Indeed, the market value of global negative yielding debt has more than doubled in a year. During August, the increase equated to a rise of almost 20% or an additional $2.7 trillion globally. In September, some of the worst of this reversed, but the trend looks set.
Equities – bumps in the road ahead
With the global economy showing signs of a late-cycle slowdown, there is always the risk of more volatility ahead. This is normal; bond and equity markets come to terms with the valuation extremes implied by negative yields on the one hand, and relatively elevated multiples in the equity market. With Central Banks still in easing mode, the downside risk for equities should be mitigated for the foreseeable future.
Precious metals – increasing demand
In an environment of ever-declining interest rates, rising debt levels, a challenging global economy and events like the recent setback in Argentinian financial markets, there is more upside for both silver and gold. Demand remains very strong, and aggregate holdings have risen very close to the previous peak in 2012.
As always in volatile markets, opportunities abound for the savvy and nimble investor across different asset classes. With this in mind we continue to encourage investors to ensure their financial planning investment strategy is aligned with the risk they can tolerate. A little bit of diversification goes a long way.
Julian Broom, Chief Investment Officer