Equities have been very volatile in August as trade tensions have escalated after further tariffs were implemented by President Trump on the first day of the month. The announcement of new tariffs triggered retaliatory measures from China, which they announced three weeks later after already allowing the renminbi to depreciate against the US dollar, hitting the lowest level in a decade. All major indices declined over the month.
Boris Johnson’s willingness to walk out of the EU with a no-deal has been detrimental to UK markets and we have seen sterling fall to a three-year low of 1.1959 GBP/USD against the US Dollar. Parliament has officially been suspended for 5 weeks until Monday 14th October as Boris Johnson’s bid to call a snap election was defeated for a second time. Our VT Gravis UK Infrastructure fund proved to be a resilient hedge against the market and it was one of our best performers of the period as it managed to escape losses and show gains of 1.8%.
The trade war which started in March 2018 between the US and China has now been at the forefront of news headlines for 18 months. Lately, uncertainty has become a greater threat as President Trump escalated matters further with an additional 10% tariff on $300m of Chinese imports. It’s unpredictable to see how this trade war will resolve and that is continuing to damage global growth. The US economy is sustaining this additional pain but we are lead to believe that growth is slowing as we have now seen the US 10-year yield curve to invert with the 2-year. What this actually means is that investors are better compensated for loaning the US over two years than they are for 10 years, which implies that short term risk is greater than long term risk. This has previously been an early indicator of a potential recession to come. The last inversion of this part of the yield curve was the one that began in December 2005, three years before the financial crisis and subsequent recession. Still, while the inversion is concerning, there is often a significant lag before a recession hits and an economic downturn ensues.
Chinese authorities have allowed the renminbi to depreciate through the stress on their own financial system caused by Trumps tariffs. This does not imply currency manipulation as China’s central bank has simply not intervened, granting market forces to determine the currency value. The effects of this devaluation in currency not only counters the impact of US tariffs but also increases the competitiveness of Chinese exports worldwide.
Across Europe, we are seeing weak economic data, fragmented and dysfunctional politics and substantial risks that we feel are not priced into the market. Brexit is a key concern that not only affects the UK but also its European counterpart, potential trade tensions are on the horizon as President Trump carries on his unpredictable term and Italy’s budget has not yet been resolved. The European Central Bank suggested that they will support the economy in their latest press conference which will most like see the reinstatement of quantitative easing (printing money to buy bonds) in Q4 2019 unless any other form of stimulus can be agreed upon. We remain underweight in European equities with some of our exposure hedged as we see a positive upside for the value of the pound on a long-term outlook.
We believe Japan will struggle from the supply chain disruption caused by US-China trade tensions and we are already seeing the weakness in their exports. The newly added T. Rowe Price Japanese Equity Fund outperformed peers and the market during August as it declined 1.0% compared to its TOPIX benchmark index which fell 3.8%.
Global growth remains slow but positive and it is likely that the dovish tilt by central banks will prolong the economic cycle, but the question remains around the long-term stability of this. Trade and geopolitical tensions have been the key driver of the global economy and we see this continuing to bring about significant flashes of volatility. We will keep portfolios well diversified to minimise their overall risk.
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