By Jordan Portelli
For those being market participants in 2018, today is no different. Trump’s tariff threats are the natural outcome of market volatility. Today is a déjà vu of 2018 where unpredictability prevails,while markets succumb to selling pressure on the fear of the unknown.
To a certain extent, this might be understandable but not unpredictable, actually predictable.Ironically, the panic selling that clearly, is driven by what we call ‘animal spirits’, is posing an opportunity for investors who were uneasy to invest given the highly stretched valuations a priori the recent correction in U.S. markets.
In his campaign Trump was pretty clear that the ideology of ‘U.S. Protectionism’ will be at the forefront of his mandate and that he will do whatever it takes to achieve such a goal – eventhrough the imposition of tariffs.
So, in reality, tariffs were expected. It is Trump’s approach together with the uncertainty of their quantum, region and/or target market that creates uneasiness not only among market participants but also among businesses and their future investments. Thus, the market jitters which kicked in in the last week of February are to a certain extent acceptable, but not entirely rational.
First things first, let’s get the economic theory right. In a trade war, there are no winners.
A very simplistic example would be a neighbourhood market — a family growing oranges, another bakes bread, and a third selling meat. Instead of each family struggling to produce everything themselves, they trade to get what they need.
On a global scale, such a system helps countries specialise in what they do best, leading to a better offering, lower costs, and stronger economic growth. However, in reality, trade warsinvolve politics and this is where tensions kick in.
Factually speaking, it is inevitable, that a trade war will ultimately dampen confidence and impact negatively economic growth. Indeed, targeted countries such as Canada and Mexico, are already feeling the pinch with both economies forecasting slower growth due to declines in hiring and investment activities driven by trade policy uncertainty.
However, the recent volatility probably needs to be analysed more deeply. It is important to analyse the tact being used by Trump and his administration. Case in point the very recent last-minute exemptions being granted suggest that tariffs are being employed strategically. While if implemented, the tariffs could potentially be rolled back in exchange for concessions.
So despite prima facie, tariffs are seen as a natural cause for high uncertainty which expectedlymarkets highly dislike, there is a backing scope to achieve a target. This is precisely why we believe that markets have been and still are highly overreactive.
Over the past weeks, we have seen indiscriminate selloffs, also in companies which probably will be immune to the planned tariffs. Emphatically speaking the sell-off is understandable but its magnitude is not.
Firstly, we believe that despite tariffs will inevitably pinch economic growth, the U.S. will still manage to have decent growth levels, given the circumstances, which actually should be even higher than Europe.
Secondly, as opposed to the 1990s, today U.S. households have increased markedly their exposures to U.S. equities by circa 30 per cent, implying that any drastic downward moves will inevitably hinder their wealth effect. In this regard, we believe that the Trump administration is very attentive to market moves and will have to inevitably fix it.
Thirdly, we believe that Trump’s approach also has its limits. Indeed, nobody believes that Trump would want to be remembered as the one who pushed the U.S. economy deliberately into a recession.
Lastly and equally important, there are also pre-electoral promises which have yet to be fulfilled over the upcoming months. Namely planned tax cuts and less tightening for financial institutions. Undoubtedly, both bode very well not only in terms of their overall impact but also on the positive sentiment that would instigate both businesses and consumers.
Indeed, we believe that this sell-off is an opportunity to dip in selective companies which overthe years have consistently delivered, and to date remain fundamentally sane.
Despite many investors’ fear the worst and sell-off, it is when the contrarian instinct kicks in that savvy investors profit with abnormal returns. Earnings season is on its way, monitor, select and take opportunistic investment decisions.
The information and opinions presented do not represent and shall not be construed as investment advice, recommendation, or inducement to buy or sell financial instruments. The information presented is general in nature and is not directed to any specific person and is therefore provided to You on the express basis that it is not advice, and You may not rely upon it in making any investment decision. Investments in any financial instruments involve risks, You should make your own research before making any investment decisions and should seek the assistance of a financial advisor if in doubt. Calamatta Cuschieri Investment Services Limited (CCIS), C13729, is licensed by the MFSA to undertake investment services business under the Investment Services Act, Cap 370. CCIS’ registered address is at Level 0, Ewropa Business Centre, Dun Karm Street, Birkirkara, BKR 9034, Malta.
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