For the past few years, the US and China have been engaged in a trade war. Starting in 2018, the US began levying tariffs on Chinese imports to which China responded in kind. First concerns among investors were the impact this would have on global growth and the profitability of certain companies. For others, the trade war pointed to a deeper long-term risk, in turn raising the potential of the American and Chinese economies “decoupling”.
The fractious relationship between China and the US has been a major headwind for emerging markets over the past 12 months. Emerging markets are generally the beneficiary of free-flowing global trade, and ‘deglobalisation’ has dented sentiment towards the asset class as a whole. However, scratching beneath the surface, there have been pockets of strong performance – and some active managers have made hay.
Having recently celebrated its 30th birthday, Templeton Emerging Markets Investment Trust (TEM) is one of the longest-running emerging market investment funds or trusts available to UK investors.
Over the period the trust has seen huge changes in the parts of the world it invests in, including the economic transformation in the Asia-Pacific region and the opening up of communist countries to global investment.
Politics is a parochial pursuit – on both sides of the argument. It’s easy enough to characterise those overcome by Brexit fervour as narrow-minded and insular: their desire for a more extreme form of departure from the EU than any referendum campaigner ever envisaged speaks for itself. Yet those who describe the potential for a no-deal Brexit as the most serious threat in our time to the UK’s economic prosperity are just as blinkered in their own way: there are any number of scarier risks that presage more substantial damage.
There are a lot of different views as to whether the current trade war between the US and China will ultimately serve the purpose of getting China to back down from its more aggressive practices around intellectual property theft or forced technology transfer.
The rally in the first quarter lifted the US and other markets to a six-month high, while sovereign bond prices have mirrored investors’ renewed confidence by tumbling from their recent two-year peak. The uber-pessimism of the fourth quarter of 2018 has turned into fresh hope that gains can be made when trade wars and Brexit have been pushed out of the way.
One of the reasons 2018 turned out to be such a disappointment for equity investors was the underwhelming performance of the Chinese economy, the ramifications of which were felt as far afield as Germany.
While most equity markets had a rough year, the performance of emerging markets and eurozone stocks were among the worst. So for 2019, some of the most important questions facing investors are what caused the slowdown in China last year and when the economy is likely to bounce back.
Stockmarkets around the world enjoyed their strongest start to a year for three decades. The S&P 500 index rose 7.8% and 3% in January and February respectively, the best first two months of any year since 1991. That run was broken in the first week of March, as stockmarkets fell on disappointing economic news, particularly US jobs data, downward growth forecasts from the OECD, and the announcement that the European Central Bank feels the need to launch fresh stimulus.
Stockmarkets surged at the start of the year as they bounced back from their December lows. Progress through February has been volatile, but the upward trend continues, despite major macro concerns.
What does 2019 have in store for the investment trust sector?
Investors will be hoping for a better year after a difficult 2018. However, while there is cause for optimism, 2019 looks likely to be another year in which the macro dominates the micro. The political and economic drivers that have delivered a rollercoaster ride over the past year haven’t gone away. Expect more thrills and spills.