Donald Trump’s “America first” policy has not won him many friends abroad. Having created conflicts with China, Mexico, and Japan, he is looking to start a fight with Europe. At the same time, America’s withdrawal from the Paris climate change agreement and from the Iranian nuclear deal, not to mention Mr Trump’s questions over the relevance of NATO, his interference in the Brexit debate and efforts to derail the European Union have hardly helped either.
That said, he is not wrong over China. The Chinese have systematically robbed developed countries of their intellectual property, either illegally or by commercial force, copying Western know-how. They have played on fierce competition between liberal economies to develop their own competitive industry on the back of abundant, cheap labour. The country has inundated an open world economy with its own goods, but has left its domestic market firmly in the hands of the Chinese communist party. Since 6 April 2017, when Mr Trump and Xi Jinping set themselves 100 days to sort out their differences, the trade war has gone from bad to worse. Relations deteriorated particularly badly in August, when both countries upped the ante and China ended up by devaluing. Talks have stalled and the financial markets are swinging between hope and despair with each passing development. The overall impact has been a slump in long rates and yield curve inversion.
The consequences are starting to affect world growth. Germany’s car industry is caught in the crossfire, for example, with BMW and Mercedes exporting to China via the USA. They are taxed as American products and their share prices are tumbling. The world’s growth rate has dropped one-tenth of a point to 2.8% in local currency terms; Germany is suffering more than the eurozone as a whole: its growth is expected to amount to just 0.7% in 2019. US growth forecasts have been revised down for both 2019 and 2020, while Singapore’s position as an international trading hub has cut its growth rate in half this year. Despite the efforts of a populist president, Brazil is on the verge of recession. Quite separately, the impact of a hard Brexit does not appear to have been taken into account. Official figures do not show any deceleration in China, but its car market has slumped. Australia’s raw materials exports have slowed and the Australian dollar is trading at its lowest level against the greenback for a decade. Manufacturing PMIs are down on both sides of the Atlantic, although services PMIs are proving more resilient. The US economy is hardly struggling, with unemployment at fresh lows and robust consumer confidence, but that could change quickly if firms start laying people off in response to rising costs or falling exports.
The markets are still nervous about the shape of the yield curve, especially as the US 30-year yield has dipped as low as 2%. The Federal Reserve says it is ready to intervene if growth falters, but has pointed out to Mr Trump that it can do nothing about the trade war. Eurozone rates have slipped deeper into negative territory, and even out to 30 years in Germany. Gold is recovering its status as a safe haven.
Analysts are revising their estimates of US corporate profits down again. Overall EPS growth for 2019 has been revised from 1% to zero, and the figure for 2020 has been cut by 1.5% in just two months. This has cut our own CAGR from 3.2% to 2.1%. We would be happy with even flatlining profits in the eurozone. Lower interest rates have partly offset weak profits in our model, and our year-end objective for the S&P 500 is now 2,951 points, some 100 points above last Friday’s close. Underweight investors might look at this as a potential entry point. Our recession scenario would lower our objective to between 2,580 and 2,744 points. We would start buying at 2,744 points; in the meantime, we are maintaining our below-benchmark weighting (35% rather than 40%, in our case).
