World Market Review May 2019

Markets recorded their worst week of the year in May, after the trade negotiations between the US and China collapsed and tariffs were hiked. The threat of an escalation in the trade war now seems even more likely. President Trump banned US companies from doing business with the Chinese giant telecoms company Huawei, elevating the current trade war to a tech war, causing much greater consequences for both countries. Regardless of the outcome of these negotiations, China will continue to focus on becoming a global superpower, leading to heightened volatility over the coming months as the stand-off continues.

UK Prime Minister Theresa May has accepted the inevitable and stepped aside, announcing her resignation to finally leave Downing Street on 7 June. For extra uncertainty, recent European elections have implied that the UK is still hopelessly divided between Leave and Remain and whoever wins the race to become the next Prime Minister will have the uneasy task of attempting a resolution. If necessary, Parliament is still likely to halt the process and prevent a no-deal exit. Alternatively, another referendum or a general election would be a risky strategy amongst the British people as opinion remains split. Even though the UK economy continues to show positive signs as it carries along without much stress, this uncertainty will most likely keep UK equities as well as Sterling subdued. Two of our UK focused funds, TB Evenlode Income and Castlefield CFP SDL UK Buffettology managed to escape losses throughout this turbulent month as they showed moderate gains of 0.8% and 0.6% compared to the FTSE 100 and FTSE All-Share averaging losses of 3.5%.

President Trump and Chinese President Xi Jinping are expected to meet at the G20 summit in Japan this June after the Trump administration raised tariffs to 25% on $200 billion worth of Chinese imports. This was soon retaliated by Chinese tariffs on $60 billion of US goods. The end result will be significantly higher prices for both consumers and businesses in the US and China, harming manufacturers that rely on imports. Whether the Americans are playing a short-term game with global trade, only to switch sentiment and capitalise on tactical gains is anyone’s guess. However, it has certainly disrupted the market, adding fuel to a slide in equities and drop in government bond yields over fears on trade escalation and the potential drag to global growth. The focus on global politics has engulfed the public in the US as Donald Trump has now threatened Mexico with a series of escalating tariffs in response to the “migration” crisis at the southern border. Interest rate cuts would be an option to provide some growth stimulus and Federal Reserve Chairman Jerome Powell signalled an openness to cut them if necessary, but whilst the direction of the economy is still unclear, they are almost certainly on hold for now. Our Baillie Gifford American fund outperformed the S&P 500 by 3.5 ppts in May.

Against the backdrop of increased trade tensions, Chinese authorities are likely to continue widening stimulus measures to battle the growth slowdown of the economy. This should also provide a tailwind for growth in the surrounding Emerging Markets and Europe. Elsewhere, elections in India have concluded, with the Bharatiya Janata Party (BJP), led by Narendra Modi, winning an absolute majority in the Lok Sabha (Lower House) for their second term. Modi’s popularity was expected as a result of his achievements over the last 5 years and this newfound clarity will allow India to focus on their policy outlook to unlock potential long-term growth in the future.

Prospects for future growth in Europe still look underwhelming. Italy has confirmed “not to have made sufficient progress toward the debt reduction criterion set up in 2018”, meanwhile, the German economy is heavily dependent on and particularly sensitive to global trade. With the added threat of a US tariff war, equities remain vulnerable.

Japanese markets have struggled in recent months from a slowdown in its Asian exports, reflecting the side effects of the trade war between the US and China. Japan’s chief cabinet secretary, Yoshihide Suga, stated that “while there may be a slowdown in exports and production from certain industries because of deceleration in China, the fundamentals supporting employment, incomes and domestic demand are fine”. With unemployment rates still at just 2.5 per cent, we believe the economy will continue to remain stable.

The economic impact of the trade war is difficult to quantify but global growth and confidence are delicate at this moment in time. However, it is possible that this disruption and any further setback will be cushioned by an additional stimulus in China and an interest rate cut by the US Federal Reserve to support the outlook. Once again, politics has been a major driver of equity markets, but we remain focused on economic fundamentals.