The fourth quarter of the year started with heightened volatility and rising uncertainty and is likely to continue this way, despite some green shoots in the first part of October.
The latest twist in the Brexit saga pushed UK stock market indices and the pound higher last Friday, but this is likely to be a short-term move. It is not clear whether or how leaving the European Union will help the UK prosper in the long run.
In a bigger trade dispute, the “war” between the US and China is far from over, although President Trump seems to think peace is near.
This commercial conflict it is redrawing the global trade map, creating winners and losers in its wake. Investors should consider carefully who the winners may be, and avoid the losers.
This is easier said than done. But analysing various points of view and scenarios could help investors get a comprehensive picture of the likely consequences of the trade war.
First of all, even though China is already being affected, not everybody in Asia will suffer to the same extent; some countries in that region could even emerge as winners.
Supply-chain shifts are already occurring, with recent trade data supporting predictions made by analysts at Oxford Economics that sales to the US by other Asian economies are likely to rise substantially because of the tariffs imposed by the US on China.
The electronics sector illustrates this trend very well. Monthly imports by the US from China have shrunk by around $600 million year on year, while at the same time imports from Korea, Malaysia, Singapore, Taiwan and Vietnam have increased by $350 million.
Exports to the US from Vietnam have increased particularly fast, whereas Chinese exports to Vietnam also increased unusually quickly at the same time, the analysts at Oxford Economics noted.
The US-China trade war could go global because, as exporters try to find new markets, they might resort to aggressive measures such as lowering prices and offering various discounts to gain market share, prompting accusations of dumping.
Oxford Economics has a global trade war scenario that includes:
— 30% tariffs on all Chinese exports to the US and all US exports to China
— 25% US tariffs on Mexico, with retaliation
— 25% US tariffs on car imports from outside North America, with retaliation
— 10% US tariffs on other imports from the EU, with retaliation.
Under this scenario, US-China trade would fall by a huge 70%, US-Mexico trade by 50%, and US-EU trade by more than a third. At the same time, trade between the US and other Asian countries would increase by 16%, and between the US and Canada by 11%. China’s trade with other Asian countries would rise by 4%.
But even if things do not go that far and the trade war remains confined to the US and China, a lot of damage has already been done. Tariffs distort trade, make things more expensive and create uncertainty, which deters people from spending.
In turn, this may boost unemployment as demand for goods and services falls and businesses close down. That would make consumers even more cautious; they would cut spending even more and this would risks spiralling into a deep recession.
It is partly why the two major central banks – the European Central Bank and the Federal Reserve – have restarted their bond purchases, the “exceptional” post-crisis stimulus measures which, in the meanwhile, have become ordinary monetary policy tools.
Will they be enough this time to keep a global recession at bay? We may be about to find out. But one thing is sure: if a recession does hit, the blame for it would lie solely with the populists.