Institutional Perspectives July–August 2019


In the July–August issue of our monthly flagship publication, we feature:

  • On the Record by Chief Investment Officer Tony Roth, where he explains why—despite the fact that a U.S.–China trade truce, impending Fed rate cuts, and all-time S&P 500 highs are quite encouraging for the economy and markets—we are more cautious on these drivers heading into the second half of the year.
  • In Focus by Senior Investment Strategist Meghan Shue reprises the three themes from our 2019 Capital Markets Forecast and takes a careful look at how those themes stack up now that we’re halfway through the year—exploring the current status of those projections as well as the risks at play.
  • Investment positioning, major themes, and asset class positioning updates.

The first half of the year is in the books, and one could argue we have packed over a year’s worth of geopolitics, monetary policy developments, and equity gains into just six months. Taking stock of where we find ourselves, we note a trade “truce” between the U.S. and China, a Fed that is about to embark on a rate cut campaign, and the S&P 500 trading at all-time highs. What’s not to love?

We do not mean to pour cold water on these three important developments that, in our view, have supported the market’s strong gains of late, but we are more cautious on these drivers heading into the second half of the year. Let’s consider trade, the Fed, and risk markets in turn.

The trade truce is a welcome de-escalation, but major hurdles remain. On the sidelines of the G-20 summit in Osaka, Japan, President Trump and Chinese President Xi Jin Ping met and agreed to a trade ceasefire. In return for no further escalation of tariffs and a reprieve for Chinese telecom firm Huawei (permitting some U.S. suppliers to resume sales to the company), the Chinese have agreed to increase agricultural purchases. Both sides will return to the negotiating table.

This development reduces but does not remove the probability of a further escalation of tariffs by the U.S. on the remaining roughly $325bn of Chinese imports. Our base case is that the status quo continues at least through this year, which is to say that existing tariffs are likely to remain in place without a grand trade bargain in the near term, but we also think both sides are eager to avoid a further escalation of tariffs. On net, this reduces some of the downside risk that we flagged back in May when talks fell apart, but the reality is that there is still a chasm between the U.S. and China on structural issues, e.g., forced intellectual property transfer or theft, and subsidies to Chinese state-owned enterprises. We remain cautious in light of a great deal of uncertainty and unpredictability around trade policy—both as it relates to China and other trading partners—which is a bad combination for business confidence and capital expenditure prospects, particularly at this point in the economic cycle. And the simple fact is that the existing tariffs alone are already extracting a heavy toll on the global economy, particularly the decelerating manufacturing sector.

Please see important disclosures at the end of the article.

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Tony Roth


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