Market Review – are trade wars slowing global growth?

Andrew Milligan

Almost ten years on from the collapse of Lehman Brothers, Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, reveals some of the important lessons learned. He also takes a closer look at what continued trade wars could mean for global growth, what assets are performing well and what opportunities and challenges are facing the tech sector.


Could trade wars slow global growth?

The phrase ‘trade wars’ has been dominating the headlines in recent months amidst expectations that political mistakes could slow global growth. Yes, this could be true but the important thing is to take a rational view and understand the potential impact.

A ‘trade war’ is certainly emotive use of language but what exactly does it mean? Is it the worrying tensions and trade friction we see today? Or is it policy errors which could lead to a material slowdown in the world economy – say if the auto sector gets badly hurt?  Or thirdly, is it a complete breakdown of the global trading system leading to a recession as bad as 2000 or 2008?

In addition, we have to consider the first and second round effects from any trade news. There will be initial damage to businesses, for example those operating in steel and aluminium, soya beans and computer chips, but what are the knock on effects on business confidence in other areas?  How do currencies respond, and do policy makers try to offset some of the pain through stimulus packages?

On balance politicians need to be careful what they wish for.


China plans to boost growth amid trade uncertainty

The Chinese government has recently announced plans to boost domestic demand. This could go some way to alleviate any future trade concerns. At Aberdeen Standard Investments, we see the latest series of announcements more as a sign that the government tightened policy too much in recent months, causing the economy to decelerate too fast. There’s no doubt that uncertainty over tariffs and protectionism has had some effect on business confidence, in China and in other countries, but it’s too soon for any of the announcements by the US to have a material impact on the Chinese economy. Of course if the trade tensions worsen, and expand to include the autos or tech sectors, then we’d expect to see more stimulus packages. Stability is something the Chinese government values very highly.

Opportunities and challenges as the tech sector soars

We’ve seen strong earnings in the tech sector with the largest stocks becoming ever more dominant in the US and Asian stock markets. Collectively this sector is approaching 25-30% of the total index. However, the latest earnings season showed some mixed performance – better for Alphabet/Google and Amazon, for example, but Twitter and Facebook showed weaker user growth.

Overall: the rise of artificial intelligence and machine learning, the growth of e-commerce and its effects on the high street, cost savings for firms by moving to cloud computing, are just a few examples. After all, assessing the winners and losers is what active fund management is all about.

It’s not all plain sailing though as the tech sector does face a possible threat from China. One of the reasons the US is taking aim at China is its concern that the Chinese government wishes to take control of the next generation of technology such as big data, robotics and 5G for commercial and military reasons. ‘Made in China 2025’ is the strategic programme and the implications for countries such as the US, Germany, Japan and South Korea could be very serious.

Emerging markets sell-off

There are a variety of reasons why investors are taking their money out of global emerging markets but it’s important to put the sell-off into context. If we look at the 50 largest stocks in the Asian markets, then their share prices have fallen by 10-15% since their peak in January 2018, but their share prices had broadly doubled in the previous two years. So some profit taking is quite understandable in those circumstances.

A question I’m often asked is, if the money is being taken out then where’s it being allocated? Defensively is the answer. We examine equity flows closely, and apart from flows into US equities most stock markets have seen withdrawals this year. Otherwise there’s been a general move away from equities and higher yielding bonds into higher quality bonds with lower yields. Our view is that funds will flow back into recent assets, as seen in July, if confidence about growth and profits trumps worries about trade and politics.


Property performs well

Selectively, real estate has performed well this year and this is something we believe will continue. However, our outlook is muted rather than strongly positive.

Commercial property is driven by a range of factors. These include: demand for high yielding real estate, the amount of new build and refurbishment, the availability and cost of capital, the competition from other high yielding assets, the state of the economy, high street spending and employment growth. And after a decade of strong flows into commercial property, a lot of good news is now in the price.

With this in mind, our real estate team has a large research department which produces detailed forecasts by country and type of office over a three year time horizon.

On balance total returns of say 5% a year are what they’d expect from global property. Otherwise location, location, location matters!

Interest rates rise – at last

It’s true that the Bank of England has deliberated for some time now but this rate rise comes as no surprise. The economy has done just about enough for the Bank of England to justify a hike but we shouldn’t get too excited about this being a sign of things to come.

It’s unlikely that the Bank of England will follow up with further rate rises in the next few months given the risks on the horizon, such as Brexit. The Bank is basing its assumptions on the UK having a smooth transition from the EU and that’s quite a big assumption at the moment. The other big uncertainty is the UK’s weak productivity – that will ultimately determine how fast the economy can grow without stoking inflation.


The collapse of Lehman Brothers – where are we now?

As we approach the 10 year anniversary of the collapse of Lehman Brothers, it’s a time for reflection with many wanting to know – what lessons have we learned? The fact is there are so many lessons to include; here are just a few:

  • As ever, a diversified portfolio will probably do better in difficult times than a concentrated one 
  • Don’t be too greedy – and remember that valuations are important 
  • Don’t rely on models, whether risk or economic, they’re only a representation of the reality of the risks facing a business or a country
  • If governments have to do the unthinkable in order to prevent a depression, then they will do so. Negative interest rates is an obvious example
  • And finally, don’t assume that you can always sell what you’ve bought – a market place will have days when it’s easy to do so – when liquidity is high. And there will be days when it’s difficult to do so – when liquidity is low.

Diversification is a key element of 1825’s approach to investing. The 1825 Portfolios benefit from specialists being involved at every stage of the investment cycle – from setting the strategic asset allocation, to carefully selecting investment funds based on expert research. Both the underlying investments and asset allocation are actively managed to ensure the portfolios meet our clients’ financial planning objectives.

If you have any questions about your investment strategy, your 1825 Financial Planner will be happy to help.

The information in this blog should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. This information is based on our understanding in August 2018.