Half-time report: global trade under threat

Neil Dwane | 08/06/2018
Half-time report: global trade under threat

Summary

This year’s mid-way point coincides with the 2018 World Cup, and Neil Dwane’s mid-year outlook assesses the world’s economic performance through a sporting lens. Global trade is the key, and it could be swayed by US protectionism, China’s rebalancing, Brexit negotiations and clashes in the Middle East.

Key takeaways

  • The global economy is fragmenting as the synchronisation of 2017 wanes
  • Each World Cup team has to use its own talent to combat challenges on the pitch. The same holds true economically, since each country must now rely on its own structural reforms instead of monetary policy to drive growth.
  • Global trade – the world’s largest economy – remains under threat as key decisions from the US and from Brexit emerge in the second half
  • In the short term, the US and China still hold the keys to the global economy’s prospects – though political turmoil in Italy, conflict in the Middle East and rising oil prices could draw red cards

As we predicted in our outlook six months ago, the first half of 2018 was marked by rising geopolitical tensions, major fiscal and political changes, and diverging monetary policy. These factors created a rise in volatility that was made more pronounced by the global economy nearing the end of its “Goldilocks” period – a time of sustained growth and low inflation.

As it happens, the mid-year point of 2018 matches up with the FIFA World Cup in Russia, where dozens of countries will engage in friendly competition for football’s ultimate prize. So how are these economies likely to fare as 2018’s halftime approaches?

First-round fixtures of the FIFA World Cup

Group A: Egypt, Russia, Saudi Arabia, Uruguay

Russia and Saudi Arabia are the oil giants of the world. Thanks to OPEC’s efforts, they’re enjoying higher oil prices and improving economies, yet they’re also struggling with demanding populations and with unreformed non-oil industries. Both are also engaged in serious conflicts around their borders that may distract their representative football teams at the World Cup. This could leave Uruguay, a heritage footballing nation, to be one of this grouping’s more likely winners.

Group B: Iran, Morocco, Portugal, Spain

Spain and Portugal recently endured difficult economic years, yet both are recovering well – and both should advance in World Cup play. Portugal made good economic progress after its banking crisis – and Portugal’s team won the European trophy two years ago without their best player, Ronaldo. Spain’s economy recovered from its real-estate crisis only to see Catalonia make a push to secede; in the same vein, Spain’s football team is fierce but may be riven with factions. Iran may be outclassed in sport this summer, but its real-world focus will be on US sanctions, and on growing its influence in Syria and throughout the Middle East – ensuring a headline role in the second half of 2018.

Group C: Australia, Denmark, France, Peru

France is enjoying President Emmanuel Macron’s economic magic, but political protest and reform fatigue could make this a tough summer. Still, the French football team will be hard to beat in the early stages. Australia’s economy has suffered from expensive domestic real estate and China’s “rebalancing” efforts, but it can also rely on its strong public pension schemes. Peru has been buffeted by flexing commodity prices, and Denmark has been badly affected by slowing global trade and negative interest rates at the European Central Bank.

Group D: Argentina, Croatia, Iceland, Nigeria

With superstar Lionel Messi on the team, Argentina could be a World Cup winner, but they need to show better coordination and determination. Argentina’s government needs to do the same as it asks the IMF for help avoiding yet another financial crisis. Croatia is a strong competitor in football, and it hopes to strengthen its economy with more investment. Nigeria’s football heritage is deep, as are the country’s oil revenues – although corruption has long been an issue. Tiny Iceland should never be overlooked: the team showed great resilience in the European championships two years ago, as did the country’s economy after its post-financial-crisis collapse.

Group E: Brazil, Costa Rica, Switzerland, Serbia

Global football powerhouse Brazil will feel pressure to play to its potential despite the country’s economic malaise and political struggles; reform is proving elusive and corruption stains linger. Serbia will be full of hopes – both on the football pitch and in its dreams of accession to the EU. Switzerland’s economy always shows discipline and rigour, even without much flair – much like the country’s football team. Serbia could give Brazil a run for its money in match play.

Group F: Germany, South Korea, Mexico, Sweden

As a grouping of football-mad nations, this is a tough bunch. As a collection of economies, however, all but Sweden are threatened by global trade wars and changing US policies. Germany’s team are the reigning World Cup champions and could ultimately prevail this year too. Economically, as well as in football, this is a competitive and reliable nation, though its exports may feel pressure in the current political climate. South Korea’s football team may be riding high after the country’s successful Winter Olympics and ongoing rapprochement with North Korea, yet its economy is threatened by trade tensions with the US and its ageing economy. Mexico is grappling with uncertainty about NAFTA’s future and a divisive upcoming election, so the country may not play to its potential.

Group G: Belgium, England, Panama, Tunisia

With Brussels the home of the EU’s headquarters, and with the UK heading toward the EU exit, Group G may come to be known as the Brexit Battle group. And here, the parallels between sport and economics are intriguing: Belgium (representing the EU) boasts a collection of great individual footballers but has not played well as a team, while England, burdened by high expectations and strong self-esteem, regularly under delivers. Regardless of what happens at the World Cup, the EU will continue playing a hardball Brexit game while the UK suffers from growing economic uncertainty and a weakening currency. Panama’s fortunes will be tied to the ebb and flow of trading through its canal, while Tunisia is still recovering from the Arab Spring.

Group H: Colombia, Japan, Poland, Senegal

These countries make a good group for World Cup competition, but their economies face several key challenges – including ageing populations and geopolitical disruption. Japan’s economy is well-resourced but needs further reform, less sovereign leverage, and younger and more diverse employment talent. Colombia and Poland are growing and becoming more independent, yet they have clear geopolitical issues: Colombia’s neighbour Venezuela is collapsing, and Poland is trying to assert its own brand of democracy with Russia not far from its doorstep. The emerging-market nations of Colombia and Senegal should progress into the knock-out rounds.

The US and China still dominate the global stage – just not the football pitch

The world’s two largest economies – the US and China – find themselves locked out of World Cup play this year, yet these two giants are still the teams to beat in economic terms. (Italy is another nation that famously failed to qualify for the World Cup this year, but the country’s political turmoil presents a bigger problem.)

The US started 2018 on fairly solid footing, with high hopes that President Donald Trump’s tax-reform legislation would further buoy economic growth – but it hasn’t yet provided the anticipated amount of stimulus. The markets watched as news ebbed and flowed about trade, sanctions and inflation, but what should be most concerning are the coming effects of more-aggressive monetary policy on an over-leveraged economy. Potential positives for the second half of 2018 are improving economic performance and post-election clarity after the mid-terms in November. US equity and bond markets may not have much left to offer: earnings momentum is peaking, valuations are high and yields are retracing towards normal levels.

Under the direction of President Xi Jinping, China continues its “rebalancing” away from an export-based economy to one powered by consumption and services. As ever, China’s policy priorities are clear: the country is emphasising employment and education, focusing on R&D and technology, and realigning industries along essential lines. This should drive better resource allocation, improve profitability and help reduce excessive use of debt while encouraging better environmental results. With China closely following its latest Five-Year Plan, we know what to expect in the second half of 2018: more of the same.

Our halftime recap for 2018

As entertaining as the World Cup can be, global economic growth is a much more serious affair – and the financial markets will be paying close attention to the second half of 2018. We expect to see a continuation of the divergence and fragmentation that are the result of central banks globally embarking upon different paths towards monetary-policy normalisation. Given the rising costs of servicing debt, economic growth will be driven less by borrowing and more by individual countries’ ability to enact successful reforms and competitive policies.

All eyes will be on China as it rebalances and on the US as it wrestles with late-cycle fiscal stimulus and additional political uncertainty. The financial markets will also be watching how trade is affected by strategic decisions around sanctions, China’s “One Belt, One Road” investments, Brexit negotiation, Italy’s new government and clashes in the Middle East. After all, the World Cup-bound nations may feel like second-stringers when compared with the US and China – but global trade is the biggest game around.



Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan];and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Neil Dwane

linkedIn
Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.

How will this economic Goldilocks story end?

Neil Dwane | 08/06/2018
Goldilocks

Summary

Thanks to central banks’ coordinated efforts, the global economy has not only recovered from the financial crisis, but enjoyed a good run of solid growth and low inflation. Take a closer look at this “Goldilocks moment” for insights into the cast of characters at play – and the surprises that may be in store.

Key takeaways

  • Goldilocks would find this global economy “just right” for supporting today’s equity valuations, credit spreads and volatility levels
  • In our modern twist on the classic fairy tale, the Goldilocks economy has enjoyed a good post-crisis run in the Three Bulls’ house – but it’s “Baby Bull” (Asia) who has the most attractive vision for the future
  • No one knows how the global economy’s Goldilocks story will end, but central banks’ successful post-crisis policies have caused enough large-scale dissonance that this “just right” moment probably won’t last forever

Our global economy is having a “Goldilocks moment” of sustained growth and low inflation: like the perfectly done porridge in the famous fairy tale, it’s not too hot and not too cold. In fact, today’s environment is “just right” for supporting high equity valuations, tight credit spreads and generally low levels of volatility. But like many cautionary tales, this Goldilocks story may not end happily ever after.

 

A modern cast of characters
Given the strong performance of financial markets since the financial crisis, we’ve put a twist on our version of this fable: our economic Goldilocks story features the Three Bulls, not the Three Bears.

  • Goldilocks. For years, the global economy benefited from the free-spirited monetary policy of central banks around the world, which have created a “just right” environment. Financial repression has kept interest rates artificially low and asset classes artificially high.
  • Papa Bull. The United States has the biggest, strongest economy around, but it may be top-heavy: for years, the US economy has been pumped up by low interest rates, excessive fiscal stimulus and unfunded borrowing.
  • Mama Bull. The European Union’s economy is closely tied to the United States’, but it has its own personality and bad habits: negative interest rates and bank subsidies have kept zombie companies alive, and the EU has little appetite for real economic or fiscal reforms.
  • Baby Bull. Asia’s economy has long been the heir apparent to its Western relatives. Although Asia’s markets aren’t as mature, they are growing – and the region’s work ethic is strong. With the right state reforms and long-term policies, she’ll have a bright future.

 

An uncertain setting
In our adapted fairy tale, the economic Goldilocks has been enjoying a good run in the Three Bulls’ house since the financial crisis, living off their resources and enjoying their services. Yet eventually, she finds that the world she’s thriving in isn’t quite as warm and welcoming as she once thought.

  • Goldilocks discovers that Papa Bull (the US) has grown a protectionist streak and is threatening to seal up his house – limiting the global trade that has been keeping everyone warm and well-fed.
  • Mama Bull (the EU) is having an internal battle; parts of her want to stay, others want to leave and outsiders want to move in. Much of her time is spent trying to quiet her internal voices – Italy is currently expressing the loudest discontent – while getting along with her increasingly cross spouse.
  • Baby Bull (Asia) has an attractive vision for the future – one built on nourishing growth, hard work and reform. Although she’s still young, she hasn’t yet inherited her parents’ fondness for excessive consumption and borrowing.

 

An unknown ending
At some point, depending on the telling, the classic Goldilocks fairy tale ends up taking different turns: some versions show her getting frightened and running off into the woods; others find her being eaten by bears. Our global economy’s fairy-tale moment is similarly uncertain – we don’t know how, if or when this story will end. But we do know that central banks globally have abused the hospitality of economies and savers instead of forcing proper capital and market reallocations. This has caused dissonance and misallocations on a scale not seen since the global financial crisis. So while it’s possible this Goldilocks moment will continue happily ever after, it’s more likely the global economy won’t stay “just right” forever.

 

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the date is not guaranteed an no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan]; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

516701

Expert-Image

Neil Dwane

linkedIn
Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.
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