Market Bulletin – Positional Play – Monday 3rd December 2018

Relationships between major powers continued to fray as the G20 gathered in Argentina, but positive news came in the form of a US-China trade ceasefire being agreed over the weekend.

A pawn in their hands?

Last week in London, as world chess champion Magnus Carlsen triumphed in holding onto his title, Theresa May was unleashing her own tactical play – to rally as many MPs as possible to vote for her Brexit deal by 11 December. The deal has been the subject of much criticism, and this week the Prime Minister was forced to acknowledge Bank of England and UK government forecasts of a loss of GDP in all forms of Brexit (the latter claimed alternative trade deals would not make a meaningful difference to the balance).

A study by Capital Economics last week said the government report was “probably a little too pessimistic about the fallout from a no-deal Brexit and a little too optimistic about the impact of a deal based on the Chequers plan.” Meanwhile, a leading poll aggregator showed a shift from the Tories to Labour last week. Shadow Chancellor John McDonnell claimed that a second referendum was “inevitable”, while the Secretary-General of the European Commission crowed that the withdrawal deal meant “the power is with us”.

Should May have to bow out of the political game, she could at least console herself that her State Pension might be available sooner than expected. On Friday, a campaign group won the right to a judicial review of the government’s handling of the rise in the state pension age from 60 to 65. Having said that, even a reversion to 60 won’t offer women retirees much of a boost. Figures from 2017 show the average woman’s State Pension was £126 a week, versus £154 for a man. This again highlights the urgent need for adequate retirement planning – please contact your adviser if you are unsure about any aspects of your pension.

A rocky start to G20

Last week, Ukraine felt the force of Moscow’s intentions in the Crimea region, as a trio of Ukrainian naval ships were requisitioned by Russia’s fleet off the Crimean coast. The timing couldn’t have been worse for international relations – perhaps not coincidentally – as it happened the same week that the G20 gathered in Argentina. Adding to the sense of doom was a technical failure forcing Angela Merkel’s plane to turn back, leading to her missing the opening of the summit.

The growing fissures are apparent across several of the world’s most important economic relationships. In Europe, there was a stand-off last week between a group of fiscally-conservative northern nations (dubbed the ‘Hanseatic’ group) and a France in search of further eurozone integration; the German Finance Minister floated the idea of France giving its UN Security Council seat to the EU; President Trump warned Theresa May’s EU withdrawal deal was “good for the EU” and would make it harder for the UK to sign a trade deal with the US; he also cancelled his scheduled G20 head-to-head with Putin; the EU said it would extend its sanctions on Russia beyond their current December expiration; and Washington pledged a second round of “very severe” US sanctions on Moscow.

It’s worth noting that the previous round of sanctions hasn’t wreaked any visible havoc; instead, a largely strong oil price has proved a boon to the Russian economy. Fresh threats of US sanctions are expected to target Russian debt; but last week the Finance Ministry in Moscow reported a $1 billion issuance of seven-year bonds, denominated not in dollars but in euros. “We are not leaving the dollar. The dollar is leaving us,” Vladimir Putin said on Wednesday. The Finance Ministry reported that 75% of the issue was bought up by foreign investors – in this area, the Kremlin may in fact be making a bet that long-term investors do not allow politics to dominate their investment decisions. “Geopolitical risks are significant at the moment and we investors have absolutely no idea how to price any of that in,” said Megan Greene of Manulife.

Honey run

With $250 billion in tariffs already active, the impact of the deepening US-China trade war is increasingly being felt by companies. Yet the trend makes last week’s US trade balance figures appear all the stranger – the US reported its largest trade deficit in five months. However, this could be a case of unintended consequences.

“A few countries will do really well from this tariff war, mainly around China – Malaysia, Thailand and Vietnam – and it’s because of trans-shipping,” said Manulife’s Greene. “In some cases, China sent solar panels to Malaysia, where they put a label on them and then sent them to the US and no tariffs were ever exchanged. Likewise, China is the biggest honey producer in the world. So China has just started sending plain glass bottles of honey to Malaysia where they literally put labels on them and send them to the US.”

In fact, the G20 summit saw the US and China agree a cooling-off period, suspending some new tariffs and reducing others, with a 90-day truce. The suspension will come as a relief to Beijing, as figures last week showed that Chinese factories are now producing more than they are selling – if demand fails to pick up again, Chinese businesses will ultimately have to shut down some production.

Investor overreaction?

Despite GM announcing US factory closures last week, the US looks to be a in a strong position; last week, third quarter GDP was confirmed at 3.5% and the S&P 500 enjoyed a strong week. Moreover, after the sell-off in emerging market equities earlier this year – in part on Fed policy and trade worries – there are signs that investors may have overreacted to troubles.

“There is an opportunity in emerging markets because you see value supported by robust fundamentals, especially since the sell-off,” said Wei Li, Head of Investment Strategy at Blackrock. “The main emerging markets index is down 13% on the year versus a 35% return in 2017, opening up a significant value gap. And that is despite robust global growth dynamics, which tend to benefit emerging markets more than developed markets. Added to it all, we’ve seen strong earnings growth.”

Tommy Garvey of GMO, Co-manager of the St. James’s Place Balanced Managed fund, shares Li’s view: “The last time that we saw such negative investor sentiment on emerging markets was in 2000. Back then you couldn’t find anybody saying anything good about emerging markets. Over the next 10 years, emerging markets returned about 11% per annum, while the S&P 500 did nothing. We don’t think that in its current form the trade wars have any meaningful impact on the outlook for emerging markets.”

Blackrock, GMO and Manulife are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley.

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