Trade and politics are top challenges in mid-year outlook

June 13, 2019 17:21
Investors are caught in the disruptive fire of the US-China trade war, which is turning into a "tech cold war" that threatens to disrupt global supply chains. Photo: Reuters

Investors began 2019 cheering the global rally in risk assets that followed a dramatic late-2018 market plunge. The tough fourth quarter caused the US Federal Reserve to stop raising interest rates despite a relatively strong US economy, aligning the Fed more closely with other major central banks that are still keeping rates low.

However, as 2019 progressed, the markets turned volatile in the face of a fragmented economic environment with multiple pain points: Investors are caught in the disruptive fire of the US-China trade war, which is turning into a "tech cold war" that threatens to disrupt global supply chains; Europe is still vulnerable to Brexit uncertainty, and recent parliamentary election results may slow the European Union’s ability to make critical decisions; the United States is continuing along its late-cycle path with growth stuck at less than 2 percent and rising expectations of a recession in 2020. Moreover, policy uncertainty related to the upcoming presidential election could create market headwinds.

Against this backdrop, we are closely watching the themes that will likely drive markets, regions and investors’ decisions throughout the remainder of 2019.

With the Fed on hold, will the dollar slide if the debt ceiling lifts?

The Fed made a surprise U-turn to its monetary policy at the end of January. Instead of hiking rates further, as expected, the central bank put future rate hikes on hold. The market is even pricing in two rate cuts by the end of 2019 and four by the end of 2020. This shift in US monetary policy may ultimately weigh on the US dollar, especially if the US debt ceiling is increased this autumn against a backdrop of looser monetary policy. But general political uncertainty and ongoing easing by non-US central banks will likely prevent the dollar from falling further.

Interest rates now seem likely to remain lower for longer. With the market already pricing in several rate cuts, investors should expect continued low returns for traditional bonds – though they may be an attractive defensive option if recession risks rise.

We believe the US dollar is likely to peak in value sometime during the second half of 2019; this may offer some relief to emerging-market assets in particular.

Polarized politics could mean higher volatility

Political incumbents around the world are feeling pressure to move away from the political center on issues such as economic inequality and immigration. Yet markets have largely stayed calmer than expected about politics because of the difficulty of anticipating policy changes. That said, some geopolitical shifts are having direct effects on markets – for example, US pressure on Iran is raising oil prices, which is hurting consumer spending. This supports our view that all investors, particularly those focused on emerging markets, can benefit from an active asset-management approach and considered analysis of political risks.

With political uncertainty high, investors might consider pivoting towards income-generating investments and away from “riskier”, more volatile asset classes.

Political events are hard to anticipate, but populism has been rising and politics are getting more polarized; an active approach may help make investment risks more clear.

A 'tech cold war' could rage for years

Amid heightened trade tensions between the US and China, President Donald Trump has fired the first volleys in a tech cold war by targeting Chinese corporations for trade practices that many describe as unfair. Supply chains could be disrupted if countries are forced to choose between Chinese and American tech ecosystems while the two superpowers vie for leadership in big data and artificial intelligence.

The tech cold war could undo the globalized low-cost, high-margin supply chains of many US and Asian tech companies.

With large American tech firms already under fire for privacy issues, new US-China tensions could cause their valuations and expected returns to decline.

Cyber-security and defense stocks may benefit from rising geopolitical hostilities.

With nearly every industry attempting to use technology to its advantage, investors will need to employ active, rigorous research as they aim to separate winners from losers.

Sustainability is a driver of long-term returns

Sustainability has quickly become a key area of focus for investors – and for good reason. In the light of increasing pressure from activists and investors, boardroom agendas are increasingly reflecting topics such as climate change, higher governance standards and board diversity. Companies that manage these environmental, social and governance (ESG) factors well are better able to strengthen their competitive positions. We believe investors should examine ESG factors for a critical layer of insight, aiming to identify key risks and opportunities that are not yet fully reflected in prices. This can have a direct effect on risk-adjusted returns.

Done well, sustainable investing is about managing risks and improving performance.

– Contact us at [email protected]


As Global Strategist at Allianz Global Investors, Neil Dwane is responsible for presenting strategic house views and overseeing the Economics and Strategy Research teams.