Quarterly market review and outlook Q4 2018:
We believe that markets will remain choppy and defying to go lower in the short term. Although there are some concerns we believe there is a lot of overreaction. There is and will be a lot of noise with negative connotations that will come into the picture and disrupt markets in the coming months. This means higher volatility and possibly more market downturns. The immediate disruptors are US/CN trade war, Brexit, rising US interest rates and the Italian standoff. The global economy also needs to be monitored but we don’t think it poses an immediate threat.
From reports we have seen the trade war is unlikely to be resolved any time soon and we could very well see tariffs kick in come January. It seems the trade war has become a political tool for Trump and he’s using it for his popularity back home. There is a lot of concern a trade war will hurt the global economy and there is surely some truth to that. However, when there are losers, there are winners and some will benefit from this and ASEAN could be one of the areas that can profit from this situation. There were two interesting points that we recently saw; one is that on consumer goods the price hike for an item like the iPhone is only $9 from the resulting tariffs. The other point is that shifting supply chains takes a long time to achieve, two years on average. So changes will have to be gradual and cannot be made instantly. China is also moving towards a more consumption oriented economy and is cutting back on the export machine it once was so could the impact on their overall economy be less than initially feared? Finally, the last time the US implemented tariffs it lasted around nine months until it backtracked.
A Brexit deal has been reached with the EU and it now has to be approved in the UK. There has been a lot of defiance about it at home but it’s now emerging it’s this deal or no deal and this deal is better than no deal. We shall see if reason wins this one. Leaving with a deal will be better for markets and we could see a small rally. A no deal would probably bring about more down markets. Either way, the impact should be limited. Projections say UK growth will slow and so will the EU but it will take a little bit of time for the outcome of Brexit to show in the real economy. At present GBP is the most sensitive to the Brexit news. Any type of good news will strengthen GBP and vice versa.
The US is raising rates and it is still up in the air whether they will in December. It was looking very likely until recently when a Fed official made some dovish. According to the report it is still locked in but could be accompanied with dovish comments which would appease markets. In addition, it seems next year will only see two rate hikes, so the pace is slowing down. The Fed is under a lot of scrutiny at the moment, especially Trump and its hiking path is disrupting markets as most other countries are loosening or doing nothing. The increase in rates is applying pressure on borrowers of course and the bond market. Low credit companies which borrowed cheaply before are seeing their borrowing costs go up and could increase defaults for some. At the moment investing in bonds is tricky.
This seems to be the least important one but could have quite a negative impact if things go sour. The Greek crisis at the time was quite disruptive and this one could be as well. We think it is mostly noise for now but are following this one closely.
It seems the global economy is ticking along. It’s not great but it’s not terrible. The US is maybe close to overheating after a great run. Europe and Japan are treading along; Europe is doing markedly better than it was few years ago. China is naturally slowing because it can’t sustain the 7% rate it had but it’s still very good and it seems most Asian economies are growing but not at the fast rates of previous years. Of course the narrative from the trade war is that it will slow down the global economy. Undoubtedly there is truth to this but the actual strength of it seems to be overstated. We are waiting for proof in the numbers rather than falling for the rumours.
The points raised previously don’t paint a rosy picture. However, we still believe there is a lot of overreaction and all of these fears are overblown. For us it is sentiment speaking rather than reality. If tomorrow US/CN reach a trade deal ( which we don’t think will happen soon ) we can be pretty confident that markets will shoot up. Brexit at the moment is a lot of noise and whatever happens, it will have minimal real world impact. Rising rates is a concern but if the Fed doesn’t hike in December or signals it is going to slow down the rate hikes, it will be good for markets. The Italian standoff needs to be monitored as well. GDP numbers from leading economies for Q4 will also shed some light as to where the global economy is going. Reports that say things are slowing down all take into account full blown tariffs and at this point are only projections.