View from the CIO: Markets are getting wise to Trump’s rhetoricPublished on 18 October 2019
Over the last quarter, it felt like some of the concerns around the US/China trade war had started to subside somewhat. There were signs of a little ground-giving on both sides as Presidents Xi and Trump began to realise it is in everyone’s interests to reach some sort of agreement. Or perhaps the Chinese - like the markets - were simply wising up to Trump’s bluster.
Trump still seems determined to bolster his domestic image and his electoral prospects for 2020 by bashing China, essentially. Only last week, the US blacklisted 28 Chinese organisations for their alleged involvement in abuses against ethnic Uighurs in China’s Xinjiang province. But he also realises that going too far could result in a significant slowdown in the global economy. This would have a knock-on effect on the US stock market, which in turn would upset his election prospects. So he has to tread carefully.
The market, for its part, has cottoned on. The style that President Trump has adopted over the last couple of years has been to delve into things, put in place various red lines and non-negotiables, cry wolf on the ensuing crisis, retreat, wait a while, remove the very thing that created the crisis, then swoop in and ‘save’ the day.
This pattern is characteristic of his foreign policy, including, his current dealings with the Chinese. Initially spooked by the bouts of volatility it created in the past, the markets now appear to ‘understand’ the US President’s modus operandi and seem less affected by the potentially corrosive fallouts, safe in the knowledge they may never actually happen.
One result is that, despite increased volatility, the stock market has continued to be very strong over recent months. The idea that it will just continue with the pace and enthusiasm seen in previous years, though, is taking on less and less probability.
It might not be a bad time to take a pause from the market, to reduce some risk and selectively allocate it to long short equity managers - those able to both take advantage of stocks which they think have good long-term prospects while ‘shorting’ or borrowing stocks whose prognosis is negative. In this way, we think that portfolios will be better positioned to handle any volatility that may come our way.
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