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Taking Stock Winter 2019

Trade wars – the new normal?

14 August 2019
Author: Jeremy Gardiner

The IMF warned recently that the main risk factors to the global economy currently are that further US-China tariffs, US auto tariffs, or a no-deal Brexit – could sap confidence, investment and global growth. It warned that these trade wars needed to end urgently, in order to boost confidence, investment and growth.

So, therefore, your financial fate over the next couple of years lies largely in the hands of two people, Boris Johnson and Donald Trump.

In terms of Brexit, a no-deal exit would be ‘an event’ in global financial markets, which would scare foreign investors and result in emerging markets, including South Africa, being punished. Not to mention, the UK and Europe are significant trading partners of ours, plus the UK is responsible for approximately a third of our foreign direct investment inflows.

Boris, however, does not have an easy road ahead. He must do in three months what Teresa May couldn’t achieve in three years.  Although committed to leaving on 31 October without a deal if necessary, Boris realises this route carries significant risk and could be ‘bumpy'. Ideally, he would like to reach an agreement with the EU, but given that the previous deal failed repeatedly in parliament, he needs a new, improved deal. The problem is, the Europeans told Teresa May months ago that it’s not up for renegotiation, and they’re sticking to that.

So Boris finds himself leading a government committed to a ‘no-deal’ exit, should the Europeans refuse to negotiate a new deal (which they may well do).  He is up against a parliament vehemently opposed to a ‘no-deal’ Brexit, and the Tories have a parliamentary majority of one. This is very likely to result in decision-making paralysis, followed quite possibly by a vote of no confidence and fresh UK elections. Boris will obviously be hoping for a stronger mandate, but anything, including a Labour/Lib Dem coalition victory, however unlikely, is possible.

Brexit aside, I believe tariff wars are something we’re going to have to get used to, because that’s how Trump fights. The Mexicans are safe (for now), India is under pressure, and Europe, particularly the automobile industry, is next. Just as markets were enjoying a pause in the conflict over the past month, President Trump, completely disregarding the ongoing efforts of his negotiators, implemented more tariffs, by tweet. Investors panicked – again! – and world markets including emerging markets (and SA), suffered.

I’ve written before that he has a strategy, that analysts believe that he is deliberately stoking global tensions in order to get the Chinese to stimulate more and the US Federal Reserve to cut more. Then, when he eventually does a deal with the Chinese, the US economy and stock markets will crescendo, peaking just in time for the US elections. The result? A booming economy should ensure his re-election next year. Apparently, that’s how the US works. A strong economy equals almost certain re-election for an incumbent president. It seems the economy is all that counts, all other negativity is just ‘noise’.

I’ve been told that this theory gives too much credit to Trump, that he is irrational and acts impulsively with little thought of the consequences. If this is the case, we better hold on tight because there’s a very real chance that the global economy is going into recession.

The risk to his strategy is that the Chinese understand how much he needs a strong economy for re-election and may well play hardball in order to try and strike a better deal with a Democrat president. Also, Jerome Powell, Chair of the US Federal Reserve, is not yielding to Trump's pressure to accelerate rate cuts, infuriating Trump and unsettling markets.

I’m pretty sure his strategy is to get re-elected. If that is the case, and he manages to artificially stimulate the US economy (and therefore also the global economy), the result will be a ‘risk-on’ environment which would be very positive for emerging markets, including SA.

And my goodness, at the moment we need every bit of help we can get.

Jeremy Gardiner
Jeremy Gardiner

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This document is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Asset Management (Pty) Limited is an authorised financial services provider. Issued by Investec Asset Management, August 2019.

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