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Italy, The UK, the USA... The autumn is all about politics

17 October 2018

It did not take an expert to know that politics would be in the news throughout the month of September, and October looks set for more of the same.

Let’s start with Italy. Despite Giovanni Tria’s efforts and announcements of a budget deficit below 2% of GDP, it was Matteo Salvini and Luigi Di Maio who held sway in the end, with a 2019 deficit target of 2.4%. The figure is not that alarming in itself, especially in light of the deficits France and Spain are running, but even that level may not be maintained (growth forecasts are probably too high), and it will not allow the stabilisation of Italy’s debt.

It is likely that the European Commission will take exception to this slippage, but it only has limited sanctioning powers to apply. President Mattarella, who made no public pronouncements this summer, could be included in the discussions and use articles 81 and 97 (on debt sustainability) in an attempt to reverse certain positions, but that looks unlikely. In view of all these developments, our positioning on Italy remains unchanged: we will steer clear of the country with the political situation so unclear.

Meanwhile, Donald Trump has renegotiated NAFTA (as the US-Mexico-Canada Agreement), and although not much has changed, it could win him some votes in the mid-term elections. Mr Trump’s threats to China have been implemented with a 10% tariff on $200 billion of Chinese imports; the market had feared a 25% rate (which is slated for 2019) and China’s retaliation has so far been modest (tariffs on imports of $60 billion), which is why the markets have barely reacted.

The Brexit negotiations remain difficult, with the EU rejecting the Chequers plan. Theresa May has few viable options, and even if she manages to reach an agreement with the EU (at the price of significant concessions), she will find it very hard to get it through Parliament. The current impasse means that the chances of a new referendum, which was not on the cards just a few weeks ago, now seems slightly less unlikely.

There has been some improvement in the emerging world, with Turkey’s central bank finally increasing interest rates and Argentina obtaining sufficient guarantees from the IMF ($50 billion + $7 billion) to reassure the markets. Not all of the problems have been solved, but the situation has stabilised.

In this highly uncertain environment, dominated once again by political issues, our bets remain limited: no exposure to Italy, few short positions on core inflation and financials, and equity exposure approaching that of the indices. We continue to hold a moderately positive view on emerging markets (but on a selective basis).

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