Monthly Commentary September 2018
In other news…
This article isn’t about Brexit. That subject’s been done to death at this point and you, like me, are probably wondering what else happened in September. So in other market news, I’ll be focusing this month on the mounting trade tensions between the US and China, and – yet again – the flare up of risk within the EU coming from Italy.
Let’s start with trade tensions. The slow progress in negotiating a new North American Free Trade Agreement (NAFTA) between the US, Mexico and Canada put some pressure on North American equities for most of the month, but these were largely resolved by the end of the month as a new trade deal was announced, more in favour of the US than the previous agreement. Less progress however with China; markets had been relatively calm as they waited for the US to impose further tariffs on an additional $200bn of Chinese exports, with good and bad news failing to materially change market volatility over the month. Upon the announcement that a further 10% tariff would be imposed and that further talks between the two countries had been called off, markets simply noted that it could have been worse as the US had been threatening to slap on 25% tariffs. As expected, China responded with 10% tariffs on a further $60bn of US goods.
“As yet, the trade conflict has not escalated into the kind of trade war that ought to worry a diversified global investor, but as the tit-for-tat continues, we are forced to watch closely for a turning point. ”Nikesh Patel, Head of Investment strategy
As yet, the trade conflict has not escalated into the kind of trade war that ought to worry a diversified global investor, but as the tit-for-tat continues, we are forced to watch closely for a turning point. Or, like us, you can reduce and reshape your equity portfolio in advance.
Looking closer to home (but not Brexit, I promise), we turn to Italy. At the end of September, the Italian government announced a larger than expected budget deficit, causing yields to rise. They haven’t spiked – this is not a Greek translation – but there are indications they will continue to rise in the coming years as the government expects to run a larger deficit for longer, although no official document has been published yet. Unlike Greece, where the fundamental problem was poor fiscal management, Italy suffers from an extended bout of weak economic growth. Italy also starts from a far better position than Greece did ahead of the global financial crisis; the problems in Italy will take many years to unfold. The impact of such a crisis would also be inherently more contained within Italy as most of its debt is held by domestic investors, and in the short term at least likely to be reflected only in clashes with the European Commission with respect to its spending plans. Whilst ultimately there are more tools in the European Central Bank toolkit to deal with a potential future crisis, the immediate risk is political – that the bizarre marriage of far left and far right uses these clashes to stoke further Euroscepticism.
From a UK pensions perspective, the big news of the week is undoubtedly that long-dated interest rates have been quietly rising in recent weeks, and are nearing 2% (just goes to show the state of the new normal that we are excited about 2%...).