switzerlanden
Keep your eye on the prize

Keep your eye on the prize

17-04-2018 | Column

What a difference three months make! At the end of last year, with an improving global economy underpinning positive earnings revisions, equity markets looked poised for more upside. Something ended up rattling the goldilocks scenario, though.

  • Fabiana Fedeli
    Fabiana
    Fedeli
    Portfolio Manager

Speed read

  • In developed markets, risks are increasing
  • The forecast for emerging markets is sunny, with clouds 
  • We do not expect a full-blown trade war, but are monitoring the risks

Three months ago, we already pointed out that “nothing ever moves in a straight line”. Call it sixth sense, call it being in the markets for more years than we care to count, this time it was President Trump deciding to wage a trade war that threw a spanner in the works. Or at least he is making concrete threats to do so, possibly with the goal to strike a ‘good deal’ for America.

As economists, we can wonder how good that deal will be for the US consumer or the many US corporates that rely on imported goods. We can see domestic inflationary pressures coming, should the protectionist measures escalate. As investors, we have to decide how to allocate assets in these markets. Our advice is to keep your eye on the prize. Rather than looking at short-term volatility, we should stay focused on the underlying macro dynamics.

The global economic cycle is still improving, and central banks, including the Fed, are moving in cautious and well flagged steps. If this continues, which is the base case of our fundamental equities investment teams, we should use the dips as a buy opportunity. Yet, we need to continue to monitor the risks. Until now, President Trump’s trade tariffs have made more noise than actual economic impact.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Trade war or negotiating tactic?

Given the number of exemptions already granted — Canada and Mexico on a long-term basis, plus Australia, Argentina, the EU, and South Korea at least temporarily — it looks like these tariffs were more of a negotiating tactic than they initially seemed, and that China is the key target. The measures per se have a limited impact on Chinese GDP, which the Chinese government could offset by implementing some form of stimulus. President Trump is also proposing measures to limit China’s investments in ‘sensitive technologies’. This de facto was already the status quo given the strict oversight by CFIUS, the US government body that reviews foreign investments in the country.

While the current status of tariffs is limited, the key question to ask is how big the risk of escalation is, with maybe more US measures, and significant retaliation from China. Thus far, the Chinese government is responding in a firm but measured way. It has announced tariffs on USD 50 billion in US products, contingent on when the US will actually implement its tariffs on Chinese products. It also appears that Beijing and Washington are currently in talks, taking advantage of the 60-day period before the Section 301-based tariffs take effect. We would expect some concessions to be made and the situation to diffuse, not without the occasional tweet.

Double whammy is not our base case

That said, we have to be mindful of the risks, and should all negotiations fail, and a full-fledged trading war break out, equity markets would face the proverbial double whammy. On the one end, earnings might be hit as both exporters and importers, depending on what side of the trade tariffs they sit, suffer. On the other end, we could expect inflationary pressures to ramp up in the US, prompting the Fed to hike rates not in line with the improvement in economic growth (as it has done thus far) but to stem inflation.

A gradual tightening cycle that responds to improvements in the global economy has historically been positive for equity markets, but a steeper tightening path to stem inflationary pressures is likely to have a negative impact. As we said, the latter is not our base case. President Trump likes to rattle his adversaries to make a deal, and China is coming to the table.

While the world is focused on potential trade wars, we see some other elements that need monitoring. Although we are still positive on developed equity markets, we are concerned about volatility over the coming quarter, upcoming protectionism and the risk of further inflationary pressures if the US economy overheats. We are more upbeat about emerging equity markets. Although, here too, trade protectionism and potential inflationary pressure weigh on our optimism, the global economic environment is still supportive for emerging markets, with solid growth across developed and emerging countries and inflation still at a low level.

Read the Fundamental Equities Quarterly Outlook

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree