With the global market outlook looking as uncertain as the World Cup, Guy Stephens, technical investment director at Rowan Dartington, comments on Europe’s unstable performance and Trump’s fickle game plan.
Europe tussles amongst global players
Germany, then Argentina, then Portugal and now Spain – Italy didn’t even make it to the competition and neither did the USA. Observe the rise of the underdogs and notably Russia who were the lowliest ranked. Whilst sport is not supposed to be politically sensitive, most leaders now have a watchful eye on what is turning into a fascinating tournament, reminding us all that the Football World Cup is the only true, global, single sport event where most nations have a team of some sort. This outcome is totally contrary to all the Russia bashing and trepidation after the debacle in Marseilles at the Euro 2016 Championships, much of which involved England fans.
Mr Putin must be grinning broadly as he observes the national euphoria behind Russia’s latest success. This comes shortly after his latest election win and contrary to all the negative speculation. 2018 really has been his year and this will be topped with his forthcoming summit with Donald Trump on 16th July, the day after the final. No doubt there will be smiles all round, agreement signings and warm handshakes which will make many US western allies squirm.
Merkel’s troubles within her German coalition are also partially of Putin’s making. His intervention in Syria has caused much of the migration crisis and subsequently her policy of accepting so many connected migrants – the same can also be said of Italy. Add to this his apparent cyber strategy and the flagrant undermining and manipulation of democracy in the West and he is doing a good job of disturbing the political status quo and stirring up populist discontent. After all, today’s media are overwhelmed with opportunity thanks to 24/7 social media which contributes to the constant frenzy of political speculation. However, this harbours discontentment with all leaders as no-one is immune to criticism and ridicule in an open democracy that allows free speech. This means that no western leader has the luxury of President Putin who squashes dissent and opposition before anyone becomes aware of it whilst the vast majority of his electorate believe what they are officially told and want to lead quiet lives. Putin has little to fear from the media whilst western leaders have everything to fear.
We would normally take much of this with a pinch of salt when it comes to investment markets as political spats and turmoil are ever present. However, Merkel’s challenges along with Italy’s political balance, when added to the ramifications of the UK’s Brexit, are causing some to question the sustainability of the Eurozone once more. Migration has been a significant influence behind the shifting sands of European politics over the last few years and is also now affecting American policy. Nationalism continues its rise. It was quite remarkable last week in parliament when Theresa May gave approval for St. George’s flag to fly above No.10 Downing St. and other government departments on England match days and Jeremy Corbyn was very quick to confirm that his own flag was on display in his office. Compare this to the prior guidance given to fans visiting Russia who were told not to fly the flag at all for fear of attracting unwelcome and violent attention. How the tables have turned.
This is also showing itself in the Brexit negotiations where the UK position would appear to be hardening and the real risk of a no deal scenario is becoming more likely. Again, this has been endlessly speculated ever since the vote two years ago, but things are now coming to a head and time is short. Businesses are starting to sit up and be counted as they plan for the future and this is causing increased equity market uncertainty and volatility. We were all initially shocked when the major events of the Brexit vote and Trump’s success emerged unexpectedly. The former is feeling like a slow downward grind for the UK economy until we emerge through the other side which is not going to be any clearer until the end of the transition period in December 2020.
Reckless Trump spooks the markets into stagnation
As for Trump, he is a fickle chameleon who will befriend anyone if it will reflect well on himself at the polls, even if this means falling out with his allies in the process. The current trade standoff with all his major trading partners is now at a level which would have surprised even the initial bears. His lack of diplomacy and blatant hard-nosed statements on twitter are still causing ructions in the polite circles of the political elite. He is willing to tread where others wouldn’t dream and will leverage US economic clout to get what he wants with little concern for protocol or who he may offend. His current trade crusade may end with the US having more of the global manufacturing pie but if he shrinks the pie in the process, that is nothing but a pyrrhic victory for him alone and everyone else is poorer.
Setting politics to one side, the fundamentals for fresh investment are looking somewhat tired. The main cause of investor hesitation is the likely trajectory of global interest rates as central banks multi-laterally withdraw their Quantitative Easing programmes. What will the effect be in terms of economic growth and will inflation continue in a subdued and controlled fashion? It feels like there is considerable risk and uncertainty but investors are reluctant to sell for now as the alternatives remain sufficiently unattractive for any major shifts in allocation.
That said, as the political environment becomes more intense, it is inevitable that Trump’s aggression is going to meet something similar from both China and the EU, possibly involving the World Trade Organisation. Historic reference to 2002 is useful. The Bush administration of the time imposed steel tariffs for politically motivated reasons but this was during the economic slowdown and Technology bust of the period. Eventually, other countries of the world complained to the WTO who ruled against the US and imposed sanctions and the US backed down. The basis of these latest tariffs is supposedly in pursuit of national security which should not hold any water with the WTO. It is blatant protectionism and so one would hope that eventually they will be ruled illegal but there is some way to go with little sign of WTO interest to date.
Meanwhile, markets are going nowhere. Up one week and down the next with the first half of 2018 delivering the worst returns since 2010 and barely covering inflation. Earnings and dividends appear robust and there are no reasons to doubt their future but if the trade spat intensifies and Brexit disagreement develops into crisis, sentiment could easily collapse and deliver a correction of more substantive proportions. The outlook is as uncertain as the outcome of the World Cup – we will be watching both with keen interest.