This is the name of the game at quite a few tables. In Italy the new government is playing with the country’s financial future and hence with the Euro. Are they bluffing? Brussels will most probably not approve their budget (a novelty) so what’s next? Will Rome take a step back and blame Brussels thus trying to save face back home? Let’s hope so!
In the UK, the game of poker has turned grim: the final outcome is far from certain. Many cards are on the table, but a winning combination is nowhere to be found. Time is running out: will PM May survive? Many would be glad to reshuffle the deck and get the right hand for a second referendum. This is false hope. In reality, the situation is far too complicated and too close to call. Maybe the EU is playing its cards close to the chest and is willing to prevent a trading disaster. As a matter of fact, we don’t really know.
In the US it turns out that our beloved Donald has played a game of bluff poker vis-à-vis Canada and Mexico. Overtaken by the harsh reality of the major importance these two neighbouring countries have in bilateral trade, the NAFTA-treaty has more or less remained as before. Although Donald might insist on a name change… more cars will have to be made in the US and American dairy products will get better access in Canada. It’s all mainly old wine in new bottles: the US had too much to lose, like Mexico and Canada by the way.
China is a different case. Here’s no bluff, the heat is on. The loss of intellectual property to China is a main thorn in the flesh of the US (and Japan and Europe). The stakes were upped in September. However, as China is importing less from the US it is harder to hurt them with tariffs as it is for the US imports from China. Both countries have raised the stakes and don’t want to budge: their relationship has soured substantially. This struggle might take years. In the meantime, China is shifting its trade away from that major trading partner who today looks more like an enemy. But loosing face vis-à-vis Trump? That could well be too painful, so the game of poker continues. Slowly but gradually both countries will start feeling the pain by way of higher prices, lower profit margins and –obviously- less bilateral trade.
The only organisation one can’t accuse of bluffing is the Federal Reserve: as a beacon of calm she raises interest rates slowly but gradually. As she did at the end of September by raising with 0,25% whereby the 2% barrier was taken. Unemployment is at very low levels, wages- and price levels are moving up a bit as is the property market. The FED has put her cards on the table and communicates clearly and effectively: maybe this strategy has contributed to the relatively quiet situation on the US financial markets and the US dollar. The FED doesn’t consider the US economy being threatened by tensions in the international trade and is likely to further increase rates in 2019 and probably also in 2020. Something international markets fail so far to consider. Most likely this will be consequential for interest rates in Europe: will they finally move up?
And how will Europe play its cards in this global trading game? So far, negotiations with the US took place quietly and unnoticed. Its Trump’s advantage to claim a success before the November elections for the Senate but he French will most likely prevent a compromise. Like in the Brexit negotiations, Macron seems to take the hardest line. Much is at stake for France, especially in agriculture. It remains to be seen to what extent they are willing to give up their own unique but inefficient market (peu ça change). The question is how much patience Trump will have. He might propose a ‘quick and dirty’ deal but he is also quite capable of landing a punch. His Republican party is far more reluctant towards a trading war with Europe as it is with China, but Trump has shown more often to care about nothing and nobody…. As long as he isn’t buried under his own house of cards…, as special counsel Robert Mueller might have a few more cards up his sleeve.
So much about cards and bluff. What’s already been priced-in financial markets and what is still to be expected? The Chinese market has dropped by 20% YTD but recently moved up a bit. In China and in certain other Emerging and Frontier markets, most pain has by now been priced-in. Europe is ploughing on at minus 3% as opposed to last year. Corporate indicators in China, Japan and Europe point to a slowing down of growth prospects: the principal point being made is the uncertainty surrounding trade frictions which slows down corporate investments.
The recent stress in Italy has not – to our surprise – led to much lower interest rates in Northern Europe. Maybe the relatively positive comments by Draghi and his confirmation that rates would (only) go up after next summer was of some help. The Nikkei went up quietly and stands at a plus of 2 – 3% as opposed to end 2017.
We were a bit premature with our expectation that our global investment in ‘Infrastructure’ would be effective October 1st. Unfortunately this will now be effective January 1st. Weren’t we top of the list? Yes, we were but the Fund’s manager wasn’t with the actual purchases of infrastructural works. In common language: he was out-bid by other Fund managers who also had to deal with large cash pools coming their way. This is not surprising. Infrastructural assets generate a dividend yield of 6 – 7% and hence attract major attention. Elsewhere, we still need a bit more time to find high yielding Private Debt solutions denominated in Euro. Not to play poker but to have a bit more time to study.
Now that the leaves are starting to fall, will that also be the case for the playing cards that thus far have been held close to the chest? We are still reluctant to equities and continue to have a low weighting in bonds. Same for the interest rate sensitivity within those fixed income investments. We continue to take small steps in the illiquid investment arena. We believe it’s too early to put all our cards on the table and go “all-in’’ again.
DOOR: WOUTER WEIJAND, Chief Investment Officer
