Why geopolitical concerns are somewhat overblown

Why geopolitical concerns are somewhat overblown

Why geopolitical concerns are somewhat overblown


The major worries for investors this year have been rate rises in the US, and geopolitics, particularly the US-China trade conflict and Italy.

If we take another look at both those issues, however, some of the concerns appear somewhat overblown.

I have previously said the US-China trade dispute would probably get worse before it gets better and that is playing out. It is clear that both sides have dug in and the issues are quite entrenched.

Anti-trade or tough negotiator?

One of investors’ main concerns has been that US President Donald Trump started and has driven the trade conflict because he is anti-free trade.

But the US has recently been ticking off revised trade agreements with other countries. It has done so with Korea and now Mexico and Canada. The US, Mexico and Canada have replaced the North America Free Trade Agreement (NAFTA) with a new trade agreement, the United States Mexico Canada Agreement (USMCA). That is a good sign and the US looks likely to negotiate with Japan and Europe.

That tells me that Donald Trump is not anti-free trade per se. He is simply negotiating to achieve what he regards as fair trade. It gives me confidence that the US will eventually strike some sort of trade agreement with China – though it may not be for a while yet.

Not such a bad number

Investors have also been fretting about the fiscal position of Italy after the populist left-leaning Five Star Movement (5SM) and populist far-right Northern League (NL) were the big winners in the March elections.
Investors were concerned that the formation of a populist Government would lead to a budget deficit blow out. Those worries faded after the election, however, with signs the budget deficit would in fact be lower.

However, they flared up again recently after the Italian Government said it would target a budget deficit of 2.4% of GDP for 2019.

But my feeling is that number is not that bad. If you go back a few months, it was thought the budget deficit could be 5 to 6% of GDP. The target of 2.4% is in the grey zone.

It is, however, below what the Europeans regards as a stable number, which is around 3% of GDP.

Putting it in context

I think there will be a bit of argy-bargy, a bit of consternation, and a bit of pressure on Italian assets. But I do not see a rerun of the Greek crisis coming in relation to Italy.

At the end of the day, the rest of Europe will likely take a hands-off approach; there will be a bit of pressure but not too much because they do not want to fuel the populist, anti-Euro sentiment which already exists in Italy. I think that issue will resolve itself in a way that is not too bad for markets.

So, in conclusion, while the US-China trade dispute and Italy’s budget deficit do raise valid concerns, and could trigger some short-term volatility, if investors put them in context they are not disastrous for investors over the medium-term.


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Original Source: Produced by AMP Capital Ltd and published on 31 October 2018.  Original article.


 

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