Donald Trump’s foreign policy gaffes make the headlines but hardly stir the markets
Richard Harris says the market response to the underachieving Trump-Kim summit and the tensions in the run-up just shows that investors see politics as important only when it affects economics
Donald Trump’s Fox-News-led foreign policymaking is erratic in the extreme but there is nevertheless plenty of optimism about the possibility of finding a diamond in the rough.
This is despite the fact that over the past month or so, he has picked fights over the Iran nuclear deal, blown cold then hot on China trade, and managed to upset his G7 allies on trade policy – flavoured by insulting and not-so-accurate tweet storms.
In comparison, he has been surprisingly diplomatic regarding North Korea, unlike his petulant advisers John Bolton and Rudy Guiliani, who came close to derailing the Kim-Trump summit through ignorant outbursts. The distinction caused many commentators to read far too much into the negotiations.
Some said that Kim Jong-un bested Trump, who agreed to cancel military exercises in South Korea. Nonsense. This is a free giveaway. The United States knows every inch of Korea, having conducted regular exercises on the peninsula for the past 68 years.
Yet others said that Trump has gained more than any other US president. Poppycock. The US would have met North Korea in recent decades had the overtures been right – it takes two to tango. The nuclear facilities that Kim has agreed to decommission are widely believed to be either already destroyed or unserviceable.
Watch: North Korea begins dismantling its nuclear test site in May 2018
Others have said that the real winner is China. It is a fairy tale to think that China would prefer a maverick North Korean leader speaking to the US, versus a tame puppet. What if it causes a waning of China’s influence – on its own doorstep?
And no one recognises how much Kim has stuck his neck out supping with the devil. America is public enemy No 1 in the North; it is a bad word, blamed for everything from bad harvests to stubbing your toe. What if the North Korean regime’s hardliners took a dim view to the whole process?
Watch: What do people in Asia think of the Trump-Kim summit?
The real winner is that the handshake took place at all. The best hope is that the meeting results in a peace treaty to finally end the Korean war. Beyond that, both leaders are masters of reneging on commitments.
And what are the stock markets telling us? They are usually the final arbiter of how important a piece of news is to the world. The South Korean stock market is one of the world’s better performers, leaping 19 per cent in 2017 alone despite threats of war and signs of peace.
The US market has risen continually from the last few months of 2017, nudged by a falling US dollar, but mainly because of Trump’s huge tax breaks to corporate America. The domestic market has ignored the possibility of trade retaliation, as US trade adviser Wilbur Ross pointed out; the new duties are only slightly inflationary.
I had expected that Trump’s foreign policy gaffes, like the withdrawal of the US from the Iranian nuclear limitation deal, to have had more market impact – but it appears not so, as long as it has little impact on widening profits. It is as if the markets are willing to discount Trump’s erratic actions as a kind of certainty in his eccentricity, and will not move unless they see hard evidence of change or extensive damage.
Watch: China and the US put trade war on hold ... for now
The big divergence has come in the performance between the US, and Europe and China. Since the beginning of 2016, the S&P 500 Index has outperformed Europe’s Stoxx 50 by 25 per cent; and China’s by a full 42 per cent. This is not easy to explain at a time when economic growth is increasing worldwide and the US has been on a tear – surely it is time for other markets to have a turn.
Part of the divergence is due to the US dollar weakening against the euro. Closer to home, the US dollar peg has probably helped Hong Kong to match the US in performing strongly. However, dollar weakness has not been consistent so the more likely explanation of the difference is the threat to trade made by the US against those trading partners.
The market has shrugged off several other major geopolitical issues, such as Syria and Jerusalem. Investors only see politics as important if it affects economics, such as in the restriction of oil, food or raw materials supplies. The markets are telling us that economics always trumps politics. With economic growth continuing apace around the world, and debt levels regarded as manageable, investors should stay invested.
Richard Harris does too much as a veteran investment manager, banker, writer and broadcaster and financial expert witness. www.portshelter.com