There was considerable expectation ahead of this weekend’s summit between Trump and Xi Jinping that a big difference of opinion story would emerge. The reality, however, was rather different, with not even a whiff of disagreement and instead, warm platitudes and confidence regarding cordial US-Sino relations for the future.
Of course, the timing of the US strikes on Syria and the announcement that a US Navy aircraft carrier battle group was headed towards the Korean Peninsula could not have sent a stronger message regarding the shifting foreign policy of President Trump. Having previously said he didn’t want to interfere in the world’s problems, Trump appears to have done exactly the opposite and is now getting more involved than Obama ever did in the earliest part of his presidential term.
This development gave a boost to defence stocks, the oil price and the US Dollar, but also suggests that the confrontational Trump style, which has so far been confined to US internal policy, is now transferring to foreign policy as well, with Tomahawk missiles behind it. This is quite concerning, bearing in mind how Putin has clearly called the bluff of the west and won, having threatened Ukraine and ‘reclaimed’ Crimea unhindered, all whilst raising the profile of Russia on the global stage. The Chinese Premier would have been under no doubt that Trump is serious about North Korea, with or without Chinese support. He may choose to stand on the side-lines as things heat up in the region, regardless of his own thoughts about it. After a decade in the shadows following the missteps in Iraq and Afghanistan, Trump is suddenly reminding the world what being a superpower can really mean.
Concurrent with this has been an increase in the pressure being applied to Russia as they continue to stand by Assad, despite his suspected chemical weapons attacks. There is a clear divide building between the west and Russia, Iran, North Korea and Syria. China will not want to get dragged into supporting either side, yet Trump is seemingly forcing their hand and they clearly have a choice to make with international trade at stake. I have to admit, reluctantly, that Trump is playing a far more incisive hand than his predecessor, cutting through the rhetorical posturing and getting down to the realities of confronting the most troublesome of the world’s problems. We are now in no doubt what the US Commander-in-chief could be capable of, and that is a big change.
Translating this into investment markets is relatively straight forward, as we saw on Friday. It looks like the strong US Dollar is here to stay, which presents its own challenges. In amongst all the international fireworks, the FED released its latest minutes and this was actually quite big news in terms of unwinding QE. The unexpected phrase in there was that the FED had ‘judged that a change to the Committee’s reinvestment policy would be appropriate later this year’ and this followed the earlier decision to raise interest rates. This is a significant change in hawkish tone and although there is nothing known about the timescales or methodology involved, this suggests a shift from the market friendly policies of the past few years, which could have implications for risk assets.
It is probably a good idea to consider how equity markets have performed so far in 2017 after such a strong, currency fuelled performance for the UK investor market in 2016, where the MSCI World Index in Sterling terms rose by 28.2% including income. However, in local currency terms this index only rose by 9.0%, so it is important to put the currency effect in perspective. From the beginning of the year to last Friday, that same index is up a further 5.7% in Sterling terms and 5.2% in local currencies, as Sterling has been relatively stable. However, other markets have delivered strong returns most notably Emerging Markets and Asia-Pacific where, in Sterling terms, total returns (including income) are 11.6% and 10.3% respectively. Meanwhile the FTSE-100 has risen by 4.2%. Much of this increase had been achieved by mid-March, following which equity markets have trended sideways as doubts regarding Trump’s policies have crept in.
The next few weeks will see the annual trepidation season of ‘sell in May and go away’, which doesn’t assist with optimism regarding making fresh investment today. It is very easy to find an article out there arguing that the markets are expensive, but they will remain at these levels until we get an, as yet unknown, catalyst to flush out the sellers to create a correction. If this occurs, either the correction will be around for a nano-second as other correction seekers jump on the opportunity, or the correction will persist because the unknown event (black swan) is very scary and introduces fear and hesitation.
I am currently recalling the well-known John Maynard Keynes quote that ‘markets can remain irrational for longer than you can remain solvent’, which strictly applies when running with a loss-making position which gets worse every day and can remain so for longer than the investor has solvency. The less painful version of this is remaining in cash at the current time. Inflation is picking up and so the ‘cost’ of not investing is the erosion of spending power rather than the crystallisation of real losses. Timing the market is a fool’s game, but the investor has to keep focused on the long-term objective. Phasing fresh investment is probably a good idea at the moment as statistically, we are due a setback but quite what will deliver that setback is difficult to see.
Trump will soon turn his attention to a promised policy that he believes will pass through Congress relatively easily as he needs some success, having failed with his travel ban and Obamacare replacement. Chinese orders for Boeing and connected investment into US infrastructure would be a neat way to deliver on his promises without the ideological economic madness of tariffs to create US jobs. There are signs that the anti-trade rhetoric is being diluted, which is a promising start to his relations with China and if this continues to evolve in a trade-friendly way, accompanied by some market friendly tax-cutting policy progress, valuations won’t be looking quite so vulnerable. China could suddenly become a valuable Trump card.
Guy Stephens, technical investment director at Rowan Dartington