Past The Peak Of Political Risk?

For over a year, investors have had to embed a risk premium for adverse political developments into global asset prices. For example, a US challenge to the long-standing consensus on the benefits of free trade has been a novel and unwelcome development. Furthermore, the uncertainty surrounding the form and timing of any departure of the UK from the EU has had a dampening effect on investment and profits on both sides of the English Channel. We are now seeing progress being made on both these questions during October which raises the prospect that they may be in the rear-view mirror for 2020. We continue to believe bearish positions on European equities may over-cautious in the context of still very low yields on government bonds.

It may have been some time coming, but the recent détente between the US and China which resulted in a “Phase 1” agreement on trade is consistent with the timing of the run-up to Trump’s re-election campaign next year. Naturally for the Trump administration, this preliminary “deal” has been announced long of fanfare and short on detail, with the actual text still under negotiation. The actual text, when it is complete, is due to be signed off between Trump and China’s President Xi mid-November.

Nevertheless, the proposed US/China agreement opens the way to a de-escalation of the tariff war currently underway. The prioritization of farm products over the arguably much more important issues of respecting intellectual property rights and forced technology transfer in our view drops a hint that domestic US politics may be the driver of a deal. From a negotiating perspective, the phasing of negotiations has echoes of the manner in which the EU boxed the UK in at an early stage by the use of pre-commitments, prior to negotiating the more contentious parts of the Brexit deal.

We note also US Commerce Secretary Ross’ recent public comments that indicate the proposed new tariffs on the European autos sector due next month may be replaced with talks between the two sides. The situation remains fluid but the direction of travel on US tariffs appears to have shifted to a more conciliatory approach as the economic damage of US trade policy – and perhaps the damage to Trump’s re-election chances – has become clearer.

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Disclaimer: Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and ...

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