Kevin Gardiner, Global Investment Strategist, Rothschild Wealth Management
An outright trade war is perhaps becoming the most immediate threat to the current business cycle. Emerging markets have been hit hardest so far. They contain some of the US' most targeted suppliers, and are also vulnerable to a stronger dollar and rising US interest rates.
How should we respond as investors? There are few winners: tariffs do no long-term favours even for the industries they are supposed to “protect”.
The US administration's tactics and presentation are not reassuring. But economists' persistently mistaken diagnoses of European and Asian “savings gluts” and mercantilism have stoked US resentment. Nonetheless, it still feels premature to position portfolios for the worst.
We still think good sense will ultimately prevail. The elephant in the room is the uncomfortable but undeniable fact that the US administration has a point: America has been one of the most open economies on the planet, and the playing field is not level. Its trading partners and co-investors know this.
Overall, we continue to see trade and other geopolitical tensions (including the uncertainties associated with the new Italian government - which is a month old already) as manageable. Meanwhile, there are relatively few signs of macroeconomic excess - yet.
In two high-profile areas we can see some cyclical headroom. US consumers are not obviously maxed out, and UK fiscal policy has more room to ease than people - including the government - think.
We worry less about a shortfall in growth - or the allegedly-approaching Singularity in Artificial Intelligence - than about central bank complacency and some eventual revival in inflation. Meanwhile, we continue to advise that investors hold some portfolio protection, but refrain from a dramatic defensive restructuring.
Market Perspective will next be published in September.
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