The CIO office’s view of the week ahead.Today’s kicking in of US tariffs on an extra USD200bn of Chinese imports, and China’s retaliation, marks a notable escalation in the trade war between the two countries. But markets prefer to look at the robust US economy, with strong M&A activity also helping (of which Comcast’s winning bid for Sky is just the latest manifestation). Markets seem to be betting that trade tensions will eventually cool. There is indeed a possibility that trade rhetoric will be toned down after the November mid-term elections. But there remains a risk that Trump ups the ante should the Republicans perform even less well than expected. Europeans should not forget Trump’s obsession with German cars. And with negotiations with Canada becoming bogged down, a new NAFTA deal
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The CIO office’s view of the week ahead.
Today’s kicking in of US tariffs on an extra USD200bn of Chinese imports, and China’s retaliation, marks a notable escalation in the trade war between the two countries. But markets prefer to look at the robust US economy, with strong M&A activity also helping (of which Comcast’s winning bid for Sky is just the latest manifestation). Markets seem to be betting that trade tensions will eventually cool. There is indeed a possibility that trade rhetoric will be toned down after the November mid-term elections. But there remains a risk that Trump ups the ante should the Republicans perform even less well than expected. Europeans should not forget Trump’s obsession with German cars. And with negotiations with Canada becoming bogged down, a new NAFTA deal is looking in doubt.
Whether markets maintain their sang-froid in the face of further possible deterioration of international trade relations remains to be seen, but last week’s risk-on sentiment helps justify our decision to resist pressure to go underweight equities earlier this year. While we are neutral on developed market equites over all, we are positive on Japan, a stance reinforced by Shinzo Abe’s re-election as head of the Liberal Democratic Party, enabling him to stay in office for another three years at least. Abenomics is set to continue, and with it the boosts to capital spending, income growth and inflation we are already seeing. Foreign investors remain sceptical on Japanese equities’ prospects — but we beg to differ.
The risk of a no-deal Brexit rose after the Salzburg summit last week. Although our base case is that some sort of deal on the UK’s exit from the EU will be struck, it will face a perilous passage through the British parliament. All this has been hurting sterling—not necessarily bad news for investors, especially for sterling investors invested in outward-looking UK equities. We remain positive the FTSE100, dominated by multinationals.
César Pérez Ruiz, Head of Investments & CIO