Share Prices & Company Research


04 February 2019

Looking for the bright side

As talks between the US and China continued last week, Nicholas Thompson, Investment Executive, looks at how the ongoing global issues have impacted markets.

“Following a lengthy period of benign market conditions, the last quarter of 2018 reminded us of the sort of place asset markets can really be. Equity markets around the world suffered their most severe annual loss since the Global Financial Crisis through 2018. In addition, the government bond market in the US observed only its fifth negative return in three decades.

“In the UK especially, the market looks very downtrodden and bearish indeed. Many will be aware of the suggested catalysts for these conditions which arguably combined to drive last year’s lower returns, ranging from geopolitical tension between the US and China to Brexit at home.

“In the Eurozone, figures released last week showed a more significant economic slowdown than in the US. Industrial production in the Eurozone slowed by 1.7% in November 2018. This is not too surprising given the issues mentioned above, coupled with the apparent slowdown in the German car industry where output has fallen 18% over the last year or so, with the emissons scandal playing a part in this. Contracting demand in China has also contributed to lower demand for Eurozone exports.
“However, austerity measures across Europe are expected to be curtailed this year and, following economic contraction in Germany, a package of tax cuts are expected to shore up long-term growth, at least according to the country’s Economy Minister, Peter Altmaier. Therefore, there are some reasons for optimism and despite UK consumer borrowing slowing in 2018, following several years of rapid growth (borrowing grew at the slowest rate since 2014, as the boom in car finance came to an end), the amount of ‘ready cash’ that companies and households in the Eurozone are holding has levelled off after a period of decline. This is an important indicator of future spending and the decline in growth of ready cash deposits has levelled off at around 5%, which is reportedly a stronger level than it was approaching the downturns of 2008 and 2011.
“However, the breakdown of relations between China and the US is arguably the most concerning global issue that is likely to compromise favourable market conditions. The campaign against Huawei, the firm described by the Financial Times as the “standard bearer for Chinese technological ambitions”, illustrates US and western concern over an increasingly influential nation, which is seen, debatably, as an uncomfortable partner. China is integrated into the world economy though, and, therefore, actual hostility towards China is unlikely to be in the interests of western economies and so it would be fair to be optimistic in respect of resumption of normal trading relations.
“The reality is that the US and the west do hold many of the cards. More is spent on defence, economies are larger and the US and its allies account for a larger portion of global imports than China. The Chinese ascent has been rapid, but the nation’s dependence on markets in high-income countries far exceeds the United States’ dependence on China.  All things considered, both the US and China would benefit from cooperation on trade and this would avoid other nations having to pick sides.”
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Looking for the bright side

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