Geopolitics is now a major factor influencing markets. Trade tensions, Brexit and protectionism continue to fuel negative sentiment and although equities calmed down a bit in January, we can see how these risks could impact markets later in 2019.
During the recent earnings season numerous companies reported weaker trading conditions due to geopolitical issues. Additionally, the economic malaise in Europe has continued, driven this time by the yellow vests protests disrupting business activity in France and ongoing concerns of heavy debts burdening Italy. While in Germany, the crucially important auto industry has struggled to adjust production to meet new emissions standards (Worldwide Harmonised Light Vehicle Test), declines in exports have already depressed the economy. In other news, the European Commission blocked the proposed Alstom-Siemens railway merger, on grounds that the merged company would hold a near monopoly position that would ultimately lead to higher prices for passengers, despite proponents saying that it would have allowed a European railway firm to compete effectively with Chinese rivals on a global basis. Each country has its own geopolitical issue and with the ongoing Brexit saga there seems to be little consensus on the future of the Eurozone. We expect this uncertainty to manifest itself through nationalist political parties gaining seats in the European elections in May 2019.
Source: Bloomberg, as at 31/01/2019.
Our European positions are based on defensive companies and in the UK we remain focused on unloved income stocks with sound international revenue streams. Recognising when sentiment and fundamentals diverge is the key strategy and in the UK we see some high quality companies trading on very attractive multiples. In the US, even though the longest ever government shutdown (over funding for President Donald Trump’s proposed Mexican border wall) put a good dent into GDP, stocks are still expensive relative to other markets and we believe some of the high valuation stocks could de-rate given the uncertain macro environment. We have increased our allocation to Asia Pacific as valuations and economic growth look better than feared.
The stock market sell-off at the end of 2018 was in part a signal that US interest rates are too high, with US real interest rates finally moving into positive territory, confirming the end of monetary easing. This monetary change combined with ongoing political tensions, particularly the US-Sino trade ones, poses a great threat to financial markets. Relations between the global super powers – China and the US – are increasingly turbulent and the growing unilateralism in world politics has become a deepening risk for global companies. This is something we will be monitoring given the mountain of global debt (governments and corporations particularly) which according to the latest figures from the Global Economic Forum is significantly higher than before the financial crisis at a minimum of 225% of GDP. Despite the Fed’s shift towards a more dovish monetary policy over the past few months, there is growing fear that a global recession is coming and many doubt how prepared the world is for it.
Source: Bloomberg, as at 31/12/18.
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CLI01345 Expiry 31 March 2019