WELCOME DEVELOPMENTS, BUT THE DEVIL REMAINS IN THE DETAIL
Richard Buxton, head of UK equities
The outcome of the G20 summit is positive for investors globally; it is good news that trade talks between the US and China have resumed, and that previously proposed additional tariffs have been deferred.
Symbolically, the most significant development of the talks is that President Trump has given his blessing for Huawei to resume the purchase of US-made components. This will be seen as a face-saving result for the Chinese authorities – albeit a challenging pill to swallow for the more hawkish commentators in Washington – making this an important development after a challenging few weeks and months for US-Sino relations.
Global markets have immediately reacted positively to the signs of thawing in the relationship, with emerging markets and cyclical stocks the principal beneficiaries. As ever though, the question remains whether, and over what timeframe, the two parties will actually achieve a deal. Big differences remain, most notably on monitoring and enforcement of any terms that may ultimately be agreed, and on how to integrate the terms into the Chinese legal framework. It feels as though we’re 90% of the way there, but nobody should underestimate the importance of the remaining 10%.
Clearly, beyond helping to underpin a more supportive global growth outlook, the summit is unlikely to have any particular bearing on the UK’s relationship with the rest of the world, or indeed with the EU. That being said, the EU’s decision to allow the expiry of a bilateral agreement that allowed Swiss-listed equities to be traded on exchanges based in EU member states, and vice versa, is a timely reminder of how difficult the bloc could elect to be, if it so choses.
DESPITE G20, VOLATILITY IS HERE TO STAY
Ian Heslop, head of global equities
Markets breathed a sigh of relief that the G20 meeting did not occasion a further falling out between major world powers. The trade war between the US and China has been one of the major causes of negative investor sentiment over recent months. It is therefore positive that the US and China stepped back from the brink of an escalation of the dispute, and that bilateral trade talks between them are back on the agenda.
Nonetheless, it would be wrong to exaggerate the importance of the “trade truce” or to place much faith in its permanent nature. The threat of tariffs has become embedded in the US foreign policy toolkit. The dispute with China may be the main example, but the US has also threatened India, the EU, Canada, and Mexico.
Other risks remain. Climate change remains “G19 plus one”, with the US isolated as a lone voice against measures to address global warming. Other potential risks include armed conflict with Iran, a spike in oil prices, a disorderly no-deal Brexit, and a banking crisis in Italy.
I believe volatility in markets has come back to stay. The two-year period of low volatility in 2016 and 2017 was out of the norm.
In facing volatility and the variety of geopolitical risks, it is essential to put diversification at the forefront. That is why, in the global equities team, we base our stockpicking on diverse criteria, and we flex our weightings to them dynamically in accordance with the market environment.
MONETARY METALS THE BIG WINNERS
Ned Naylor-Leyland, manager of the Merian Gold & Silver Fund
The G20 event in Japan over the weekend looks to have been an exercise in face-saving and can-kicking. US President Donald Trump seemed more conciliatory than of late and while there were some placatory noises regarding trade, I can’t help but be sceptical about the likelihood of any meaningful outcome.
What is most relevant to investors, though, is whether anything happened that could change market direction; on that front, the G20 was a non-event. While real rates have bounced very slightly and the likelihood of a 50bps cut by the US Federal Reserve in July has dipped, the direction of travel – easing – is still embedded in market expectations. As such, the outlook for gold and silver remains positive in this lower real rates world. Indeed, we have seen a swathe of poor-to-awful macro data releases of late, reinforcing the need for cuts and accommodative monetary policy. These releases chime with the Bank of International Settlements’ (BIS) 30 June update, which was full of warnings about structural risk and the need for governments to support central banks in navigating the current environment; indeed, BIS general manager Agustin Carstens called on policymakers to ‘ignite all engines’.
Investors need to recognise that we are back in the pre-2013 era once again, one of accommodative policy, support and quite possibly further central bank balance sheet expansion in due course. All of this, I believe, infers higher monetary metals prices.
TECH BOOST AS TRADE DEAL REVIVED
Nick Payne, manager of the Merian Global Emerging Markets Fund
The agreement to resume Sino-US trade talks is undoubtedly positive for the global economy and for equity markets. Market expectations of a truce had risen into the event, but the encouraging reaction of China’s equity market is telling. The positive surprise was Trump’s willingness to relax restrictions on Huawei as part of the deal-making process to get talks restarted, so technology supply chain stocks have responded well.
We continue to believe that both sides want a deal but resumption of talks does not mean completion of talks. Expect a more drawn out process over the next six months or more, as both sides try to resolve the most difficult final aspects of the deal.
Markets may celebrate in the short term but nevertheless are likely to remain wary of Trump’s fickle nature and his willingness to suddenly go aggressive if he sees political or negotiating advantage in doing so.
IT’S A TRUCE…FOR NOW
Nick Wall, portfolio manager, multi-sector fixed income
The outcome of the G20 summit was very much in line with the market’s expectations. The headline positive development is that there has been no increase in tariffs, for the time being at least.
However, global purchasing managers’ index data published today show that the trade tensions that have persisted over recent months have already had an impact on global value and supply chains, with the inevitable result that businesses have already reined in their capital expenditure plans. In our view, businesses are going to need more certainty than they received over the weekend if they are meaningfully to resume investment.
Put another way, that the summit did not result in a deterioration of trade tensions is to be welcomed, but it is disappointing that we have not yet seen a reversal of the de-globalisation theme that has been in place since Donald Trump entered the White House. With some concessions on Huawei issues and vague, unconfirmed promises to buy more US goods, this was, in short, more of a win for Xi than for Trump.
TIME TO CARRY ON
Delphine Arrighi, portfolio manager, emerging market debt
We were not expecting the G20 summit to result in a US-China trade deal, and so the fact that one hasn’t yet materialised is no source of surprise. We continue to see a world of slowing global growth, but a key positive from the summit was that there has been no deterioration or further aggravation.
China’s economic stimulus over the last year has proved supportive of growth, and there is every expectation that this will continue for the foreseeable future. The more challenging global growth backdrop only reinforces the case for the US Federal Reserve to cut policy rates, which in turn would ease the pressure on other central banks, and we expect a number of them, ultimately, to follow the Fed’s lead.
The absence of a thriving global growth environment aside, given persistently low global yields, we have entered an era in which “carry is king.” Given still-attractive yields available from many emerging market bonds, we believe this is a favourable environment for the asset class; the Fed on hold or even cutting rates will allow emerging market central banks to ease their policy stance with portfolio inflows likely to offset any pressure on their currencies, which, with most still about 20% undervalued, could even see some upside from that global monetary easing.
This is where we see some of the most interesting opportunities at this juncture. Nevertheless, hard currency emerging market bonds remain attractive, given the global search for higher yields, and continuing scope for capital appreciation as policy conditions ease, creating something approaching a “Goldilocks” environment for emerging market debt.