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De-synchronisation of global growth, the impact of tariffs on corporate earnings and the US mid-term elections will likely dominate investors’ perceptions in the next few months.
Six months into the year, investors are still struggling to find returns in equity and credit markets and we continue to hold a cautious outlook across asset classes, albeit with a moderately positive bias towards equities and a negative bias for global rates.
What can we expect from the ongoing trade war saga and how will it affect global growth?
The current ‘tit-for-tat’ trade war is leading parties involved (and by-proxy, the global economy) into a‘lose-lose’ outcome. In the short-term, protectionism will result in economic de-synchronisation, but ultimately higher inflation will take its toll on consumers and global growth. President Trump is standing by his election promises and keeping his protectionist rhetoric intact, but at the same time his team must balance the pros and cons of such a strategy as the decisive US mid-term elections approach. Harley Davidson is the first casualty on the US side; other companies will likely follow – especially in Republican states where political pressure on Trump may well escalate. Providing some hope of a sensible solution, on 1 July, China introduced tariff cuts on consumer goods and automobiles – more than a thousand taxable consumer goods were reduced from an average rate of 15.7 per cent to 6.9 per cent, while tariffs on cars and auto parts were reduced to 15 and 6 per cent respectively.
In this context of heightened political noise, we maintain a pragmatic approach. Our baseline scenario is for a moderation of global growth and higher inflation in the long term, but we are comforted by tight labour markets and healthy consumer spending around the world. We expect a pickup in economic activity in Europe and the UK, although we acknowledge the superior macroeconomic position of the US.
Turning to asset class views, we are neutral on rates with a negative bias. Normalisation of monetary policy will continue, led by the hawkish Fed, but moderation in global growth will leave rates in a sideways formation.
In the credit space, carry collection remains the only game in town and we see limited upside in both investment grade and high yield segments given current spreads. We continue to favour issuers with strong fundamentals.
For equities, we expect modest gains for the coming quarter, contingent on positive earnings from the corporate world. Robust economic activity and divergence from the rest of the G7 group makes the US our preferred region. However, flat returns year-to-date make Europe and UK attractive destinations too. On a sector level we see value in the consumer sector followed by technology and energy.
In conclusion, the summer lull will be stirred by strong doses of political ambivalence and corporate (as well as macroeconomic) realism. As always, investors should look though the noise especially in a bull market that stretching its limits and a world economy that is trying to re-synchronise.
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