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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 quarter.
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 (consistent with our views from the second quarter).
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. Ultimately though, higher inflation will take a toll on consumers and global growth. President Trump is standing by his election promises and keeping his protectionist rhetoric intact, while his team must balance the pros and cons of such a strategy as the decisive US mid-term elections loom. Although Harley Davidson is the first casualty on the US side, other companies will likely follow, especially in Republican states. Political pressure on Trump may well escalate. That said, 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 – raising hopes of a sensible solution.
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 likely 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 as tight spreads offer no major upside. We continue to favour global high yield over investment grade, focusing on 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.
The emerging market space experienced heavy losses in the previous quarter – owing to political events (in Turkey, Mexico, and Brazil) and trade related factors (in Asia Pacific). Although we don’t see imminent recessionary risks, expectations for a growth moderation and a stronger dollar cast a large shadow on this space. The only bright spot currently, and unrelated to the World Cup, is Russia.
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 through the noise especially in a bull market that stretching its limits and a world economy that is trying to re-synchronise.
FOR PROFESSIONAL INVESTORS ONLY