Trade Tensions Special

Fresh US tariffs against Chinese imports, followed swiftly by Chinese retaliation, are casting a shadow over prospects for the global economy. But just how much could they hurt growth? And what are the implications for various asset classes and for investors?

In this special edition of Perspectives, experts at Pictet Wealth Management (PWM) set out to answer these questions.

Christophe Donay, PWM’s Chief Strategist and Head of Asset Allocation & Macro Research, starts by putting the current trade tensions into perspective. In his view, trade tensions have been having a “greater bearing” on asset classes than on the real economy. In particular, he believes the lack of visibility induced by tariff disputes has contributed to the valuation compression seen this year.

Pictet’s chief strategist believes that the impact on global growth may not become apparent until as late as the second half of 2019. Trade tension could have a greater impact on business and consumer confidence, but even then, Donay writes, “with world GDP growth standing at 3.6% year-on-year, even the indirect negative impact is unlikely to be drastic”. Away from trade, he reminds his readers that his “core investment theme”, innovation, was continuing to drive equities’ performance—a reminder that properly grounded investment decisions will always involve thinking beyond short-term market noise.

But it would be wrong to totally exclude unwelcome outcomes from escalating trade tensions. According to PWM’s senior US economist, Thomas Costerg, “the real risk is that strong growth encourages President Trump to double down on protectionism”, while PWM’s senior Asia economist Dong Chen writes that, “beyond trade, China’s worsening relationship with the US is becoming a major concern”. Chen fears the Chinese leadership is interpreting the US’s aggressive stance as a bid.

Away from trade wars, César Pérez Ruiz, PWM’s Head of Investments & CIO, highlights the “opposing forces” that markets are having to contend with—between low equity volatility on the one hand and rising economic policy uncertainty on the other, for example, and between the historical highs reached by the S&P 500 and the rush to buy protection through put options (suggesting investors are unconvinced by future prospects). “The consistent theme is uncertainty,” Pérez Ruiz writes, “an uncertainty that is aggravated by President Trump.”

With PWM engaged in revisiting the foundations of its strategic asset allocation (SAA), this issue of Perspectives also contains an interview with Philippe Dubey, Global Head of Multi-Asset Classic & Bespoke at PWM. The approach to SAA needed to be updated, he explained, to take account of the emergence of new asset classes and the changing financial environment. Yet, as Dubey describes it, SAA remains all about enabling investors to build an asset mix most likely to meet their medium-to-long term objectives. “Just like people have their own ideas about how to make the perfect cocktail, SAA is about achieving ‘the right mix’ to meet an individual’s long-term investment goals,” he writes.