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05 June 2019

Breakdown in trade talks fuels further market volatility

After the US imposed three rounds of tariffs on more than US$250bn worth of Chinese goods last year, hopes had risen that a deal could be reached as hostilities reduced. However, following intense talks between US and Chinese officials the May 10th deadline to reach an agreement passed, and as a result the US raised tariffs on Chinese goods to 25% from 10%. Naturally, China has retaliated, increasing tariffs on US$60bn of US goods just three days later.

As we enter June, we do so on the back of the worst month of the year so far for global stock markets, following the steady flow of negative news and sentiment around the trade discussions.  Even as we began this month, the weekend just passed (1st and 2nd June) saw China release a report criticising the US for “exorbitant demands” and “resorting to intimidation and coercion”, in another signal of the relationship between them worsening.

This will continue the downward pressure on stocks, and we are seeing a flight to safety with investors buying government bonds and gold, driving the price for these safe-haven assets higher. One of the hardest-hit sectors has been the car industry, as the likes of Ford and General Motors lowered their profit forecasts citing higher steel and aluminium prices post-the impact of tariffs.

President Trump has added to global concerns by also targeting Mexico with his latest tariff threat. He announced a 5% levy on goods coming from Mexico beginning in less than two weeks, with further rises of 10% in July and 5% each month thereafter until the tariffs reach 25% in October, unless Mexico helps stop the flow of illegal immigrants into the US. The ramifications of this are still being worked through, but Oxford Economics estimates that 25% tariffs on Mexican imports will reduce US growth (GDP) by 0.7% by 2020.

The issue for investors is that this continued uncertainty for companies on the terms of their trade means that estimates on revenue/profit growth become more uncertain, a factor also at play for UK companies regarding Brexit uncertainty. While there always tends to be uncertainty in some parts of the globe, current conditions seem to be prevalent no matter where you look. Until a deal is reached with China and, closer to home, between the UK and Europe, investors are likely to continue to suffer and we see further volatility over the coming months. 

For us as investment managers, and protectors and growers of wealth, the key is to weather current storms while investing for the long term. A diverse portfolio including some of those safe-haven assets mentioned above is key, as is tuning out some of the current noise. As Warren Buffett said: “Predicting rain doesn’t count. Building arks does.” We continue to focus on the long term and delivering for our clients through good and bad times.

James Andrews, Director - Head of Investment Management

Please note, investments and income arising from them can fall as well as rise in value and you may lose some or all the amount you have invested.




 
Breakdown in trade talks fuels further market volatility

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