Macroeconomic Views

Research Paper - Global Investment Views - August 2018

United Kingdom, July 30, 2018 by Amundi

The dominance of politics: investment implications

Concerns about trade continue to take centre stage.While US assets have so far been resilient amid escalating protectionist rhetoric,markets targeted by tariffs are under pressure.We still don’t believe a full trade war is likely and we still expect decent economic growth, though decelerating and less synchronised, and with only mild inflationary pressure. But, trade disputes could impact business confidence and investment plans, interfering with central banks (CB)’ interest rate normalisation processes.

Trade talks are just the tip of the iceberg in a more complex geopolitical world. In our view, we have entered a new era of the dominance of politics vs economics. New forces, more inward-looking, with nationalist nuances are now underpinning new political agendas all over the world. Bilateral relationships are likely on the rise vsmultilateralism; threats to globalisation could comemore into play. This neworder could influencemarkets in many ways. First, due to permanently higher levels of geopolitical risk. These risks are not easy to price and can create short-term volatility, but also have long-term implications. This means that predictability of a central scenario that underpins investment decisions decreases significantly, and with it, the opportunities for strong directional risk exposures. Second, due to trade tensions, global growth will not necessarily lead to global trade growth. This new order, with forces at play pointing to further fragmentation, resulting in divergences in economic and market performances, implies a reorientation of strategies towards more domestic/autonomous stories. International diversification that did not work properly in the last 30 years, due to correlation ofmarkets to global trade factor, should do better going forward. Global and diversified approaches become paramount to taking advantage of opportunities in this new framework. Third, on a medium-term perspective, the more proactive/expansionary fiscal policies promoted by the populistic wave will put pressure on public debt and fiscal sustainability. This is of particular concern considering that total global debt skyrocketed to USD 250tn in 1Q18. Fourth, we may see mounting political pressures on CB, especially in the US. The threat to CB autonomy and credibility is a risk not currently priced into the market. Deficit and debt monetisation could become the ultimate temptation.

In conclusion, the scenario for investors is becoming increasingly complex. In the short term, it looks to be too soon to call an impending bear market. It is important to exploit opportunities in areas that can still benefit the most from the extension of the cycle (US equity) and rotate towards new themes (sector divergences are relevant, and in Europe, we have already seen a rotation towards defensive sectors). For longterm investors, looking for entry points in asset classes that have already discounted most of a gloomy scenario (EM assets) is a key strategy to add value, with a focus on bottom-up selection. Due to higher risks on the horizon, enhancing the resilience of portfolios – ie, improving credit quality, increasing liquidity buffers and further reducing risk concentration -- is becoming paramount in order to protect investor assets.