Although the US and China have finally struck a trade war truce, tensions definitely remain. Meanwhile in the UK, the prospect of a no-deal Brexit hangs in the air. Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, considers what these mean for investors and what the implications are for the global economy. He also looks at how emerging markets are responding to political strains between the US and Iran and whether the UK retail sector can ever recover.
US and China reach trade war truce
We’ve seen financial markets rise and fall as they’ve responded to a series of mixed messages from various politicians and officials in the US and China.
Negotiations have been taking place partly behind closed doors and partly in public, with both sides needing to reach a deal which ‘saves face’ and can be sold to key supporters.
On 29 June, US President Donald Trump and his Chinese counterpart, Xi Jinping, finally struck a trade war truce, as Washington vowed to hold off on further tariffs and declared trade negotiations with China to be ‘back on track.’
The key thing for investors to remember is that even though trade matters have been put to bed for the time being, there are still many other difficult issues between the two countries that need to be sorted out. The whole debate about 5G and Huawei is just one example.
All in all, we believe the ongoing strategic rivalry between the US and China is one reason to think about taking slightly less risk with investments – and to be ready for bad news at some point, especially as the US elections approach.
Tensions surge between the US and Iran
Tensions between the US and Iran have risen after the downing of a US drone and attacks on oil tankers in the Gulf of Oman. This escalating rivalry is having an effect on emerging market investments in general and particularly in the Middle East.
Oil matters. Higher or lower costs of energy can have an impact on everything from the attractiveness of commodity and oil producers and oil services companies, to tax revenues and, of course, the disposable incomes of many households around the world.
At Aberdeen Standard Investments, we believe that in the short term the political risks in the Middle East are likely to push oil prices higher. However, as we move into 2020, it’s likely that there will be fewer barriers to the US exporting oil as it becomes more able to deliver shale oil to overseas customers. This should be a factor which reduces oil prices.
Facebook announces its own currency
Facebook has been making the headlines again, this time with the announcement of a digital currency called Libra that will potentially allow billions of users to make financial transactions worldwide. The launch of such a new cryptocurrency next year would pose a number of questions for regulators, major banks and financial institutions.
A few examples include how to prevent money laundering, how to guarantee the safety of any savings, and how to prevent cyber attacks.
Central banks, such as the Bank of England, have been considering digital currencies for some time. And in countries which already have a mainly cashless economy, such as Sweden, the benefits are recognised. For example, removing cash from an economy can provide a small but definite boost to economic activity, and allow transactions and savings flows to be monitored much more closely.
For now though, the format proposed by Facebook isn’t backed by any government – it’s simply an electronic form of the dollar. The form in which money is held and used does change over time. But there are dangers of moving too quickly, as many a financial crisis over the years has shown. Expect the regulators to take a very close interest in this new idea.
The UK retail sector remains in trouble
The retail sector continues to suffer in the UK, as it does in many other countries. Despite low levels of unemployment and moderately positive wages growth, households are still being cautious about what they spend their money on. In broad terms, small luxuries, experiences and entertainments are preferred to big ticket items such as cars, houses and home furnishings.
As everyone knows, e-commerce is also having a major effect – why go to the high street or shopping centre if the items you want can be delivered to your door?
The effects are partly being seen in some companies going bust or needing to change their business plan radically. Another impact is being seen in parts of the real estate market. Major shopping centres which are a ‘destination’ for a day out are still performing quite well, but many others are seeing much weaker or even negative rental growth as tenants try to cut their costs.
At Aberdeen Standard Investments, we aim to hold more of the winners of this battle in our funds, such as selected internet retailers, warehouses and distribution centres. However, past performance isn’t a guide to future returns.
Brexit – deal or no deal?
Will we see a deal or no deal? The answer to this question changes day by day depending on the latest statements from the candidates in the Conservative Party leadership election, analysis of what they actually meant, and surveys of voting intentions.
All in all, we continue to point to sterling against the US dollar or the euro as a good measure of how concerned markets are by the situation. At the moment, we think the probability of an outcome which would be poor for the UK economy has been largely but not completely priced in. Sterling reached 1.20 versus the US dollar after the referendum result, so about 1.26 at present there is some leeway. Surveys suggest overseas investors are holding off from buying UK assets until the situation is rather clearer.
The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in.
Information is based on Aberdeen Standard Investments’ understanding in July 2019.