After a bumpy May, June brought some summer rays of hope. The global economic highlight was the G20 summit where some of the top world leaders from 19 nations and the European Union gather to discuss current topics and plans for the future. The optimism surrounding this meeting and comments from the US Federal Reserve has eased a bit of the tension in the markets and given investors a few reasons to remain calm.
The US/China trade war hit a bit of a rocky patch in May when President Trump announced an increase to the existing tariffs, up to 25% of a selection of goods coming from China. On top of this, he instituted additional sanctions on specific Chinese companies, the largest being the technology company Huawei one of the crown jewels of Chinese companies. This sanction specifically banned American firms from buying from the Chinese tech giant. In retaliation, China has restricted the supply of rare earth minerals to the United States. It also said it would publish a list of “unreliable” foreign entities who have damaged the interests of Chinese firms. With this trade war going on for over a year now, it only seems to heat up with each passing day, as both sides continue to jab each other to see who will flinch first. This is why this G20 meeting was so important, as it was the first time in recent months that the two leaders have come together to speak. The meeting did go well, as both sides have eased a bit in their rhetoric. President Xi did mention he was ready to make some concessions on tariffs, barriers, and intellectual property. He also promised to expand to six new free trade zones inside the country, opposed to the one current free trade zone. President Trump also said he would relieve some restrictions on Chinese companies, and hold off on additional tariffs for the time being. Days prior to the meeting, the US Treasury Secretary also stated that the deal was 90% done and there is a path to complete it. Positive words for a trade war that has gone on for quite some time and is beginning to hurt both economies.
In China, the trade war continues to hurt their economy and they have seen a slow decline in the PMI Index (Purchasing Manager’s Index) since the beginning of 2018, both in manufacturing and non-manufacturing. Socially, there was also a very public outburst not normally seen from China. Hong Kong attempted to pass a bill that would allow extradition to China from the once British colony. This caused a massive uproar in the city where hundreds of thousands took to the streets for days in something resembling the Toronto Raptors winning the NBA championship. This bill is seen as a move by the Chinese to slowly remove the rights of the people of Hong Kong, as they have been doing over the years since Britain gave up the colony in 1997. Considering the reliance on China, it will be a difficult battle for Hong Kong to continue the fight to keep their autonomy.
The G20 had some great highlights, but through all this, there was very little progress on Canada’s front. Prime Minister Justin Trudeau went through a series of awkward exchanges with China and Brazil both of which have had it out for Canada recently. China recently has banned Canadian meat after an investigation found forged paperwork attached to some pork entering China from Canada. This is another export that you can add to the list that China has sent back ever since the arrest of the Huawei CFO. A decrease in exports is generally not good for the economy and is coming at a time in Canada where there is minimal GDP growth and rising inflation. This situation is referred to as “Stagflation” with slow or negative GDP growth and increasing inflation. Stagflation can be really tricky to operate around because cutting rates could stimulate the economy (GDP), but at the same time also increase inflation. Generally, this is not that way you want your economy to operate and hasn’t been seen in North America since the 1970s when US President Nixon was at the helm. This could also give a rise to commodity and goods prices in Canada, as a prolonged time in “Stagflation” would not be good for investments unless it is a commodity.
We have seen gold break through $1,400 USD per ounce (which hasn’t happened since 2016) and is often viewed as a protection against inflation and currency. Oil has also jumped in price in June, going from about $51 USD per barrel to about $58 per barrel near the end of June. It is also interesting to note the greatest gold run in history began in the 1970s when it went from $230 USD/oz to about $1,600 USD/oz at the end of the decade. In that same time, oil went from about $21 USD/barrel to $120 USD/barrel. Another interesting note is that bitcoin has also had a steep rise in price. It is unknown what causes the rise and fall in bitcoin, but the best guess would be to protect against currency depreciation. That time period was drastically different from today and there were a large number of other factors involved, but an interesting history lesson to keep in mind nonetheless.
With all this uncertainty, the US Federal Reserve has come to the rescue to reassure investors that they will be there to cut rates if the markets/economy needs them. They continue to speak a dovish tone and have given the indication in a difficult global trade situation that they are likely to cut rates to help the US economy to continue to move forward. This gives investors some reassurance that in absence of a trade deal there will be a little relief, we hope that the economy can pick up without the reduction of rates which would indicate a better economy than one with a rate cut.
With all of this, President Trump has threatened a new round of tariffs but this time on the EU. This comes in the wake of an argument with the EU that has given too much assistance in the form of subsidies to an EU airliner (Airbus), giving them an uncompetitive advantage over Boeing. The recommended tariffs would directly impact meat, cheese, pasta, fruits, coffee and whiskey, of which EU exports approximately $4 billion into the US each year. This translates into potential increases for consumers, as all tariffs eventually get passed on to the end-user. Therefore prolonged tariffs would lead to a sharp rise in inflation.
While this has been happening, Britain had a vote in parliament that came down to a single vote 313-312, which elected that Britain cannot leave the EU without a deal in place. Considering the leadership changes going on presently, this would most likely mean another extension in the making, resulting in the longest break up in history.
We continue to believe in equities primarily, as it is still difficult to believe in other asset classes at this point in time. While the decrease in rates helps bond prices, it is difficult to choose a 2% bond over a 4% dividend at this given time. We expect there will continue to be volatility this year, with continued fears of a slowing global economy and upcoming elections. As we have previously stated, commodities look more attractive to close out the year and into 2020 as a result.
With all that said, our investment thesis remains the same with a balanced approach especially with markets performing well. We believe in a mix of Equities, Alternatives and Fixed Income. We still believe there are a lot of great opportunities, even at these levels in equities, but investors will need to be much more selective going forward. For more information, please do not hesitate to contact us.
Konrad, Justin, and Merriel
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Content Sources: Bloomberg, Trading Economics, Yahoo Finance, Reuters
Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.
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