Market Insights – August 6th, 2018

Weekly financial & economic analysis.

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One day after the US administration unveiled plans to raise import tariffs from 10% to 25% on USD 200 billion of Chinese goods, China retaliated by announcing tariffs ranging from 5% to 25% on USD 60 billion of American goods. For China, that leaves just USD 20 billion, given that it imported a total of USD 130 billion from the US in 2017. Non-tariff-related measures can be expected if this tit-for-tat attitude continues.

Brazil continues to catch up with Mexico and other emerging markets. In the last two weeks, its stock market gained 3.6% and the real was up 1.7%. Leading up to the October elections, there are questions as to whether Lula da Silva will run, after he was nominated from his prison cell, as the Socialist Party’s presidential candidate.

Unsurprisingly, the Bank of England raised interest rates for the second time, mainly in response to the buoyant job market. Sterling fell on the news, partly because the rate hike had already been priced in by the markets, and  because the pound continues to be dragged down by the uncertainty surrounding the Brexit deal.

America First or America Alone?

Nothing seems to be holding back the US market, which is edging closer to its record high. Economic activity is on a firm track on the whole and inflationary risk is low – creating a still-favourable climate for global stock markets. This uptrend could be halted by bond yields, which are back at around 3%. What’s more, Mr Trump’s relative unpredictability may become more problematic for investors. The markets did not react well to his most recent plan to raise tariffs to 25% on USD 200 billion of Chinese goods, and a correction followed. Continuing with this stance could soon prove to be counter-productive – the USA’s trading partners will have no choice but to respond to the US measures. The reactions of some US companies give some idea of the impact on the domestic economy. According to the Fed, industries in several regions are starting to express concerns about the tariffs and have observed that prices have risen and/or that inventories are running thin. But every cloud has a silver lining: new trading partnerships are taking shape, with Europe ratifying free trade agreements with Japan, and the UK toying with the idea of joining the Trans-Pacific Partnership. Such agreements could leave Mr Trump isolated on the international scene. While the trade war does not yet appear to have affected consumer prices, more protectionism would certainly drive up costs. Further inflationary pressure could come from the recent hike in the prices of some agricultural products following the droughts. However, these cost hikes should to some extent be offset by price movements on other commodities such as oil, which we expect to move within a range of USD 65 to 75 per barrel. This environment is not necessarily a good one for gold, which is not being helped by the normalisation of monetary policy. And the dollar remains firm, probably because the Fed’s monetary policy is more aggressive than that of its European or Japanese peers.

Alternative funds: a review of Q2

Risk assets got off to a strong start in Q2 before quickly losing steam, and equities ended the period in negative territory. There was considerable dispersion among equities, with growth stocks and the US market sharply outperforming while value stocks and emerging markets massively underperformed. These uneven trends had a mixed impact on alternative strategies. But even if they lost some ground over the period, alternative strategies were much less volatile than other risky assets – a sign that they are capable of preserving capital during market downtrends. Event-driven managers posted the best results. They benefited from a number of auctions on announced deals (e.g. Sky and 20th Century Fox), positive developments on some complex M&As (such as when AT&T won its appeal allowing it to acquire Time Warner) and a number of fin-

alised deals (Bayer, for instance, finally obtained all the authorisations it needed to acquire Monsanto). At the other end of the spectrum, long-short equity strategies were hurt by market momentum, with fewer and fewer stocks gaining ground. Tech funds were of course among the frontrunners. We nevertheless remain cautious on this segment, with a preference for market-neutral products.


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