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Trade war threat ends the first half to 2018

The first six months of 2018 were tough on equity markets; gauged by the main price indices, European equities fell 3.95 percent, US equities gained 1.67 percent and UK equities fell 0.66 percent. This contrasts sharply with the first weeks of the year when hints of a synchronised global economic expansion seeped into exuberance and market all-time highs.

From there, various factors blunted optimism but none greater than the consistent threat of a trade war instigated by the once champion of free trade, the United States. Add to the mix, a UK that has failed to determine a waypoint on BREXIT, a stronger dollar hitting emerging markets, an ECB that seems to prefer delaying normalisation of QE, migration tensions in Europe, a populist government in Italy, potential political instability in Germany and it is easy to understand the pressure on financial markets.

In this environment, core assets performance has been mixed. European Autos this year lost 11.8 percent and banks lost 15 percent. But technology gained 8 percent and luxury holdings surpassed 14%.

Meanwhile, trade skirmishes keep on escalating, and likely will get worse before getting any better. On Tuesday the US threatened an additional round of 10 percent tariffs on $200 billion worth of Chinese imports which could deliver a major blow to China's export sector if it takes effect.

The new list shows that Washington is targeting key Chinese manufacturing export industries. By listing potential tariffs on goods including refrigerators, cotton, and steel and aluminium products, the Trump administration is going after China's electronics, textiles, metal products and auto parts industries. It appears that when compiling the latest list, the US took into account what would cause most disruption to the Chinese economy.

China’s immediately reacted and accused the United States of bullying, warning it would hit back after the Trump administration raised the stakes in their trade dispute. China appeared to be shocked by the new threats and while evidently intending to complain to the World Trade Organisation, as yet has not indicated how it would retaliate. Expect the worse.

Chinese foreign ministry spokeswoman, Hua Chunying was quoted as saying in her reaction that “This is a fight between unilateralism and multilateralism, protectionism and free trade, might and rules.” This statement exemplifies the reversal of roles between the traditional champion of free trade and diplomacy, the US, and its ideological nemesis, China. As recent as a few years back it would have been unthinkable that China would be defending globalisation against a protectionist US.

Going forward an equity strategy geared to gain from a global economic acceleration may face temporary headwinds. However, a solution on trade is in the best interest of all parties and few market players believe in a different long-term scenario. Likewise negative factors are mostly geopolitical in nature while fundamental arguments remain strong and sustainable. Over the long-term this period may well be viewed as another investment opportunity. Hopefully.

This article was issued by Antoine Briffa, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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