Investment update - May 2019

President Trump and his Twitter account continued to move markets. This month, the President further ‘weaponised’ tariffs by threatening to impose them on all imports from Mexico (the US’ second largest trading partner) unless the country stemmed the migration flows coming up from Central America. With the benefit of hindsight, it is not inconceivable that President Trump’s objective all along was to use the threat of tariffs to wrap up his trade deal negotiations with Mexico quickly and to his advantage.

The other big Trump story of the month is Huawei. And this will likely have seismic geopolitical ramifications. By taking on Huawei, President Trump risks splitting the world into two technological halves. Perhaps this was beginning to happen already, but President Trump has rammed it home by banning Huawei’s interaction with the American technology sector. Given the way these two powers have interacted, it is hard not to expect China to strengthen its resolve on the other side. This was followed by pictures of President Xi standing in a rare earth manufacturing plant, subtly retaliating. Game on.

President Trump is potentially posturing for re-election in 2020. From an outsider’s perspective, it is difficult to reconcile this objective with his impact on global equity markets, sending them plunging and then pushing them back up again, all via the stroke of his digital pen. But the President seems to do this without regard of the value he destroys and then re-creates. Perhaps, as the election gets closer, his message on standing up to China and getting deals signed will resonate with voters enough to put him back in the Oval Office for another four years. However, it seems safe to say that volatility is the new black.

Central banks are so far embedded in global financial markets, with a decade of quantitative easing (or 30 years of unconventional monetary policy in the case of the Bank of Japan), it is hard to imagine a world without them. The ECB, the RBA and of course the Fed have all pledged their support for markets this month and investors seem to react more to the ongoing certainty of this support, rather than the fundamental economic headwinds that exist. No matter the short-term volatility relating to President Trump’s day to day actions, as long as the central banks are in, so are investors.

Brexit continues to dominate headlines and the political agenda in the UK. It is hard not to admire Prime Minister May’s tenacity and resilience in the face of the harshest of political environments. But locals seem to have less admiration for her, seemingly because of her inability to politick – that is, to get her Parliament to buy in to her withdrawal agreement – and UK residents bear the cost of the stalemate. She has now resigned, and a new contender will take over this seemingly unsolvable conundrum. Boris Johnson is the frontrunner in a crowded field. Johnson is a big character, and may not be what Brexit needs. Time will tell if the members of the Conservative Party think he is the best person for the job.

Finally, Australia has the new Morrison Government. Markets seem pleased with his re-election and perhaps Australia may finally have some stability at the top. Prime Minister, Scott Morrison took a very slim agenda to the election – more of the same rather than the big reforms favoured by Bill Shorten’s team – and now has authority not seen in an Australian Prime Minister since John Howard. What he will do with this authority remains to be seen. The economy needs stimulus and Morrison’s promised tax cuts go some way to providing this. But more fiscal support is also needed. There seems to be some movement in smaller infrastructure projects. But will he risk the holy grail – returning the budget to surplus – by doing something bigger? We watch this space.

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