Global financial markets are focussing more on global politics this year than they did in 2017 – and there’s a lot to hone in on.
Close to home, Brexit negotiations probably aren’t making as much progress as the UK would like, with the EU holding its ground in talks. We’re not much closer to understanding what the final Brexit deal could look like for the UK, which is certainly difficult for financial markets to price in.
The recent Italian elections act as a reminder that populist parties continue to gain traction on the political stage. In Italy, almost half of Italian voters picked populist parties that have been critical of the EU, which could make future policy-making in the eurozone a lot tougher.
In the US, moves to introduce higher tariffs on imports have sparked fears of a trade war yet this shouldn’t really come as a surprise to anyone following American policy closely.
US rhetoric over the last year has focussed on trade and bilateral trade, especially around NAFTA negotiations between the US, China and Canada. Now we’re just seeing signs of this extending into other spheres.
Disagreeing with Trump’s stance on tariffs and trade, economic advisor Gary Cohn has just resigned. Usually, the departure of one economic advisor wouldn’t garner much of a reaction, but the departure lounge at the White House is getting busier and this makes any walk-back on tariffs by Trump unlikely.
In general, financial markets and mainstream economics are aligned in thinking that trade wars are bad news for global growth.
Then, looking to China, it seems that President Xi will stay longer in office than his predecessors. There’s a question around what impact this will have on financial markets and Chinese policy-making.
What’s the latest with global markets?
Global markets have been weaker since the end of January, as it starts to digest concerns over global growth and geopolitical noise.
The global economy has actually been performing quite well, with accelerating growth translating into a decent performance on financial markets over the last few months.
There are two themes seem to be triggering some nerves on the financial markets.
The first is that if inflation continues to accelerate, Central Banks may be forced into tightening monetary policy at a faster and more aggressive rate than initially priced in by investors. This triggered volatility in financial markets at the beginning of February.
The second is around US-led trade war. Higher tariffs will feed into higher costs, which could translate into slower growth on a global basis.
What does this mean for your investments?
With corporate profitability high and global growth accelerating, the underlying fundamentals still look decent. But it’s fair to say that financial markets are focusing more on the risks than they did in 2017.
It’s important you’re comfortable with the level of risk you take in your portfolio, and be sure this reflects your investor profile to give yourself the best chance to reach your goals. Whilst you shouldn’t take too much risk, be sure not to miss out on any growth by taking too little.
Diversification is a simple strategy that can help manage the risk in your portfolio. This allows you to take advantage of a range of different themes.