CIO: Equities will survive Trump’s trade war

The escalation in the trade war between the US and China has effectively slammed the brakes on this year’s upturn in global equity markets. But while uncertainty is currently high, we continue to see a fine return potential for equities in the slightly longer term.

All was fine and dandy for equity markets in 2019 until Donald Trump grabbed his phone on 5 May and fired off a tweet on new, higher tariffs on Chinese goods. Market sentiment immediately shifted from harmony to uncertainty and that is where we have been since – in the midst of a storm where equity prices have risen and fallen on the back of the latest announcements from the US and China.

We are in a state of crisis it would seem – but how bad are things actually?

Look at returns

Until Donald Trump’s infamous tweet, global equities were up almost 17% this year, and they have fallen 6% (in local currency) since then. Hence, 2019 has still generated a very decent return despite the storm that has swept through the financial markets in the past month.

“Moreover, storms do pass, and when the wind eventually drops we expect that equities will continue to offer the most attractive return potential. That is why we are maintaining a slight overweight in equities in our portfolios and a matching underweight in bonds,” says Anders Svennesen, CIO, Danske Bank Asset Management, in the new Quarterly House View Summer 2019.

Tail wind from central banks

He points out that equities are benefitting from central banks in Europe and the US postponing rate hikes until far into the future – that is if they do not cut rates in the US instead – while the greater uncertainty could, moreover, cause the Chinese authorities to stimulate the economy further to counter the negative impact of the trade war.

”Hence, when we look at the full picture, it still appears more positive than negative to us over the coming 12 months – though there is no doubt that the short-term outlook is more muddied than a month ago,” Anders Svennesen says.

Could get worse before it gets better

However, the longer it takes to reach a deal, the more uncertainty can take hold of global growth and spoil the overall picture – and this is clearly a risk. Perhaps the two parties need to experience even more pain before they feel ready to make the necessary concessions. In other words – it could get worse before it gets better.

”However, both countries are suffering on account of the trade dispute, so our main scenario remains that they will agree a reasonable deal in the next six months,” Anders Svennesen says.

Expect a return of 4-7%

Overall, we see more factors pulling equities higher than lower, though there is a significant risk of further price volatility in the short term. We expect global equities to produce a return of 4-7% in the coming 12 months, while our expectation of low interest rates for an extended period tends to make bonds less attractive than equities.

”Nevertheless, bonds should still comprise an important component in any portfolio, as they help increase stability – and that is a very desirable quality, not least in turbulent times like these,” Anders Svennesen says.

 

READ the new Quarterly House View Summer

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Disclaimer: Danske Bank has prepared this material for information purposes only, and it does not constitute investment advice. Always speak to an advisor if you are considering making an investment based on this material to establish whether a particular investment suits your investment profile, including your risk appetite, investment horizon and ability to absorb a loss.

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