Agreement in sight, but only on Brexit
A limited cease-fire seems to be emerging in America’s trade war with China. But chances now look better that Dublin and London can reach an agreement which would open the way for an orderly Brexit. This could be very positive for the European economy and, if it happens, could boost powerfully stocks that are closely linked to the domestic markets of the UK and the Irish Republic.
Some lessening of tension in the Sino-US trade war
On October 11, Donald Trump outlined “Phase 1” of a comprehensive trade deal with China, which he suggested could be finalized within a few weeks. China will buy $40bn. to $50bn. worth of US agricultural products under the agreement and additional US tariffs on Chinese imports, scheduled for October 15, will not be implemented. (As of now, yet more additional tariffs scheduled for December still stand).
There may even be some progress in the difficult area of intellectual property rights, but the details have yet to be negotiated and announced. Given that all existing tariffs are retained and that in such negotiations “the devil is in the details” we suggest recent developments be considered more of a cease fire than anything else. An agreement may not hold; several previous agreements have come apart. If one considers in terms of medicines what for the moment has only been verbally outlined, then we suggest that any trade deal will amount to a remedy which might treat the symptoms of a disease but will not address the underlying causes.
On the positive side one can say that, for now, the US and China have decided not to try and infect one another with the viruses of ongoing trade hostility. Moreover, to the extent that the rhetoric of trade warfare is dialed down, the risks inherent in populist protectionist policies are reduced. Having reached a Phase 1 of “Partial Armistice”, one might hope that the two countries can progress to Phase 2, namely a “Significant Free Trade Agreement”. But we remain skeptical as to the potential for long-term progress. The underlying issues of conflict – “which country will be dominant in 20 years’ time?” and “whose politico-economic system will prevail?” – are unlikely to be resolved without hostilities, including in the area of trade.
In fact, we assume that a substantial trade agreement will only be possible after the US Presidential election in 2020. Only then will America’s future leaders be determined. There is little incentive for Xi Jinping to conclude a trade agreement with the Trump Administration given the latter’s weakness and the possibility of its impeachment. Moreover, Chinese leaders might calculate that, if they wait, there is a good chance that President Trump will be succeeded by a more accommodative American leader.
Trade hostilities negatively impact investment and growth on a worldwide basis
Current trade hostilities are hitting the world economy. In September Chinese exports fell 3.2% year on year, while Chinese imports fell 8.5% on a comparable basis.
At last – some development in the Brexit saga
The bilateral rapprochement between Ireland and the United Kingdom to prevent the reintroduction of a border within the island of Ireland has greatly increased the likelihood of an orderly exit from Britain out of the European Union. If Dublin and London can settle their differences, it will be difficult for other EU countries not to support the deal.
A Brexit agreement would be very positive
A Brexit withdrawal agreement would be very positive. Moreover, the chances of a Labour victory in forthcoming elections would be reduced. Boris Johnson would have better chances of a longer-term occupancy in Downing
Street and markets could hope that he would use his time there to promote market-friendly policies. Irish and British equities along with the British pound would probably gain the most from such a development. And, among Irish and British equities, those with a focus on the domestic market, should do particularly well. But the benefits of an end to Brexit uncertainty go well beyond the British Isles. We would expect European investment flows more broadly to be stimulated. The risk premium on European equities should sink, laying open the prospect of an end to the long-term underperformance of European equities relative to American ones.
But an orderly Brexit is still not “in the bag”. For now, in the absence of agreement or yet another extension for the period for negotiations, the UK is scheduled to leave the EU at midnight on October 31. Of course, there may be penalty time in the form of yet another Article 50 extension. But Ulster’s DUP has already voiced misgivings on this score and Boris Johnson’s minority administration is, through the “confidence and supply agreement”, dependent on the votes of its MPs.
In August, industrial production in the Eurozone was able to rise slightly (by 0.4%) compared to the previous month. This represents a small ray of light in a pretty gloomy picture. The extent of the recession within Europe’s industrial sectors becomes clearer when one considers that this represents a 2.8% contraction on a year on year basis.
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
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Disclaimer: Produced by Investment Center Aquila Ltd.
Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no under-taking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information pro-vided. All information is provided without any guarantees and without any explicit or tacit warranties. Information and opinions contained in this document are for information purposes only and shall not be construed as an offer, recommendation or solicitation to acquire or dispose of any investment instrument or to engage in any other trans
action. Interested investors are strongly advised to consult with their Investment Adviser prior to taking any investment decision on the basis of this document in order to discuss and take into account their investment goals, financial situation, individual needs and constraints, risk profile and other information. We accept no liability for the accuracy, correctness and completeness of the information and opinions provided. To the extent permitted by law, we exclude all liability for direct, indirect or consequential damages, including loss of profit, arising from the published information.
