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The market regains some life after a constructive G20

21 December 2018

The first weekend of December’s G20 summit in Argentina was highly anticipated by investors. The key point of this meeting of leaders was the dinner between Xi Jinping and Donald Trump.

The market regains some life after a constructive GF20

It ended with a three-month truce on trade. Mr Trump postponed the effective date of a 25% tariff initially scheduled for 1 January. China, in turn, massively lowered its import duties on vehicles made in the US and sold in China.

With a view to a longer-term agreement, the Americans want to launch discussions about three key topics: intellectual property theft, non-tariff obstacles, and “forced” technology transfers.

Concessions from China on these issues could mean the start of a long-term agreement.

As December gets underway, we are maintaining our ‘equity’ exposure, primarily for the following reasons:

  • attractive valuations in several geographic areas (Europe, China, and Japan);  
  • a rise in US rates that is expected to slow down, weakening the dollar and benefiting the US and emerging economies;  
  • brisk capital inflows to the US and a return to the emerging markets;  
  • and better (or at least steady) business margins, carrying over into 2019.

Still, many political risks persist. In Europe, the situation appears to be easing somewhat, with Mr Salvini’s government ready to make concessions so that its budget will be approved by the European Commission. The main risk is still Brexit. A decisive vote is scheduled for   11 December in the UK Parliament to approve the agreement negotiated with Brussels. If it does not pass, the UK could be in uncharted waters, and headed for a “Hard Brexit”.

Finally, while the additional time given by the US administration to negotiate with China is crucial, it is not enough by itself. A long-term agreement is necessary to keep investments from plummeting in the US. A rekindled trade war would impose a severe burden on the global economy and the financial markets. The shadow of the political risks that defined 2018 still looms over 2019 and could be the reason for the high volatility on the equity markets.
 

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