International Equities

Tariff talk leads to a turbulent August

Markets during August were given the washing machine treatment – tumbling this way and that with a long-term trend being counted in minutes.
September 2019

Markets during August were given the washing machine treatment – tumbling this way and that with a long-term trend being counted in minutes. Nerves were alive and well as tariff tensions increased; Donald Trump lambasted the Federal Reserve with some extraordinary comments; the Brexit hoo-ha continued; Italian politics resumed its standard chaotic state as the Prime Minister resigned; Hong Kong descended into strong resemblance of civil war; Greenland appeared in the headlines when Mr Trump (yes, him again) suggested it would be a smart idea to buy it – essentially a “large real estate deal”; whilst slowing growth seemed to emerge everywhere. And much, much, more to keep the markets on edge.

At the time of writing the US-imposed China tariffs are set to increase to 30% (from 25%) on approximately $250 billion of goods from October 1st whilst tariffs on $300 billion of goods will be taxed at 15% (from 10%) in two tranches – on September 1st and December 15th – or not. To say the situation is fluid is an understatement as every time Donald Trump comments on the matter the goalposts seem to shift. China has retaliated although those details also remain ‘fluid’ and Mr Trump has bounced back by “demanding” that US businesses move operations out of China. You couldn’t make this stuff up.

Tariffs, as we have repeatedly remarked, are very bad business. They impact economic growth, adversely, everywhere. Many US businesses are already feeling the pinch from higher import prices and curtailed supply chains whilst the great Chinese export machine is sputtering. The slowdown in China is directly hitting other front-line exporters such as Germany and Japan.

Mr Trump, never one to waste a day without some extraordinary tweets said: “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi.” To the uninitiated Mr Powell is Chairman of the US Federal Reserve whilst Chairman Xi is, of course, China’s supremo. President Trump believes the “Fed” should have reduced interest rates by at least a full percentage point at the end of July when it opted for “only” 25 basis points. We emphatically disagree – particularly since the “Fed” has stopped the gradual shrinkage of its enormously bloated balance sheet. Quantitative easing is once again a reality whilst quantitative tightening is well and truly buried.


Other news from around the world

Central banks in other countries that have also recently reduced their key interest rate include: New Zealand, Australia, Russia, Chile, South Korea, Brazil, South Africa, Mexico, Saudi Arabia, India and Turkey. It is expected that the European Central Bank will cut its deposit rate next month – probably to a negative 0.5%. Robust world in which we are living isn’t it!

As seems always to be the case it is difficult to make sensible comment about Brexit as the final form is still unknown whilst politicians and civil servants on both sides of the channel do their very best to frustrate every initiative – of whatever character. Boris Johnson has brought his unique bluster and effervescence to the debate and appears to have weathered the G7 summit in France without any damage and a significant and surprising lack of gaffes.

As we have remarked many times we are content for Britain to exit the EU providing the “deal”, if there is to be one, doesn’t lock the country into the Customs Union for an indeterminate period. If it does, leaving the EU is a complete waste of time.

The events in Hong Kong are disturbing. Conspiracy theorists speculate that the ongoing and increasingly violent protests are stage-managed by Beijing to provide an excuse for total take-over and integration. We don’t know if there is any truth in the theory but the energy now being thrown into the protests could be counterproductive. In the meantime the Hong Kong economy is being seriously wounded and even if peace were suddenly to break-out it is likely that inbound tourism will be damaged for quite some time.

The Italian Prime Minister, Giuseppe Conte, resigned on August 20th and promptly launched a withering attack on his deputy, Mattel Salvini. Mr Salvini leads the anti-immigrant far-right League party which was in coalition with the populist anti-establishment Five Star Movement until early August when Mr Salvini pulled the plug by announcing he could no longer work with his coalition partner. Mr Conte, a law professor, with no previous political experience, was installed as a compromise Prime Minister 14 months ago. He is not a member of any political party but is considered an ally of the Five Star Movement.

In a hastily cobbled together marriage of convenience a new coalition has now been arranged between the Five Star Movement and the former opposition, the centre-left Democratic Party (PD). The point being to frustrate Mr Salvini’s leadership ambitions despite his party being the most popular amongst the voters. It has been agreed that Mr Conte will again be the Prime Minister. So we now have the odd situation where Five Star has moved from a coalition with a right-wing party to one with a centre-left party. Does this sound like a stable long-term arrangement? Meanwhile, Mr Salvini will be biding his time in the wings. Expect more ructions.

Leading Italy is a tough gig. It is surprising anyone wants the job. The country can’t grow fast enough to escape its huge public debt burden, the banking sector remains in a fragile condition and demographics (ageing population) are the most adverse in Western Europe. And, of course, being part of the eurozone provides no exchange rate manoeuvrability whilst fiscal flexibility is strictly limited.

Patience in the investing world is a very rare commodity but we have never encountered an environment when it has been quite so important.

German recession

The German economy is struggling. Industrial output is falling and GDP contracted in the second quarter. Recent growth figures make for depressing reading: a fall in GDP in Q3 2018, zero growth in Q4 2018, growth of 0.4% in Q1 2019 and now a negative 0.1% in Q2. The Bundesbank expects the third quarter to be also negative thus resulting in an “official” recession (two consecutive negative quarters).

It is exports that are the cause of Germany’s current malaise. It is an exporting powerhouse and the alarmingly rapid slowdown in China combined with the weak state of its fellow eurozone members (and others) is having a deleterious impact on demand. As a consequence it is a sure-fire bet that the European Central Bank will soon unleash another round of quantitative easing and perhaps other measures. And we all know how QE has such a positive impact on the long-term health and trend growth rate of the countries involved. Don’t we?


Our favourite ‘new’ product – graphene – has again been in the news as scientists at Brown University in Rhode Island have discovered that if graphene is incorporated in clothing it could stop mosquito bites as the insects are unable to penetrate the material. At the same time it blocks the chemicals in sweat and body odour which attract mosquitoes. Brave volunteers with a graphene oxide (GO) film on their arms received no bites when their arms were plunged into a mosquito- filled enclosure. More work needs to be undertaken by the researchers but assuming commercial development does eventually proceed it could be a major weapon against mosquito-transmitted diseases. Graphene is an atom thick and 200 times stronger than steel. In other words, it is remarkable. It will never leave the headlines for long.


Gold has continued as one of the favoured destinations amid the market and economic uncertainties. In US dollar terms it has risen by almost 20% since May and in many countries it is at a record high expressed in local currency terms (thanks to US dollar strength). It continues to be purchased by several central banks (particularly the Russian) as a means of diversifying out of US dollars. Private investors are once again taking up the investing cudgel – having missed the first part of its rise. We wouldn’t bet against further solid price increases.

Fixed income

Bond yields continued to dive during August. In the US the 10-year yield spent some parts of the month at a lower level than the 2-year yield – historically a fairly reliable predictor of a looming recession. This time may be different but, again, we wouldn’t bet on it. Some of the fall in the US and elsewhere is undoubtedly in expectation of further bursts of quantitative easing – whereby central banks will buy into the diminishing free float of government bonds – diminishing because they already own a great chunk of total bond issuance. The rest of the fall in yield is because of the grindingly slow pace of economic growth and the expectation of even slower growth.

10-year government bond yields below zero are now on offer in: Japan, Germany, France, Sweden, the Netherlands, Switzerland, Denmark, Finland and Ireland. Yes, Ireland! – the country that went bust in the financial crisis. If you really fancy being paid back less than you invest then please be our guest. But it’s not a party that we intend joining.


Equity markets had a rough month. At the time of writing (market data to August 29th) most markets in local currency terms are down around 2-4%. The majority are also down over 12 months. The MSCI ‘world’ price index expressed in US dollars is down 2.5% month-to-date and 2.6% over 12 months.

Smooth sailing in the months ahead is not in our forecast. Equity markets are expensive and have been buoyed by constant bouts of quantitative easing by the “independent” central banks. This is set to resume (or continue in the case of Japan) but corporate profit growth has stalled. In the US, on a whole-economy basis, pre-tax profits are no higher than five years ago (source: Bureau of Economic Analysis). Again in the US, the net buyer of stocks for several years has been the increasingly leveraged corporate sector. Share buy-backs have been all the rage whilst the retail market and foreigners have been net sellers. There are now signs that corporate buybacks are waning. The corporate debt load and its quality is a concern.

It is difficult to find a decent return anywhere. These conditions are unique in our experience. Patience in the investing world is a very rare commodity but we have never encountered an environment when it has been quite so important.

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