MacroscopeTrade war, rising interest rates call for caution, even though global growth looks strong

Patrik Schowitz says with the US and China digging in for a prolonged trade fight and central banks tightening monetary policy, caution is needed and investors should cast a prudent eye over their portfolios

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Trucks stand prepared to haul shipping containers at the Port of Los Angeles, the US’ busiest container port, in San Pedro, California, on September 18. Photo: AFP

Published: 10:15am, 12 Oct 2018Updated: 10:31pm, 12 Oct 2018

As we enter the final quarter of 2018 and look back over the past months, it is quite clear that this year in markets has been characterised mostly by concerns and fear. This is a stark contrast to 2017, which had mostly been about hope.

The surge in global growth that we witnessed in 2017 has moderated this year, and this has exposed worrying weaknesses in some economies.

Faith in US economic strength spreading around the globe has been shaken by the US-China trade war. Worse, fears over an imminent end to this mature economic cycle are increasingly palpable.

However, looked at rationally, these worries still seem premature. The current period of above-trend global growth should extend well into 2019, and an actual recession, in all likelihood, should still be some way off. Nevertheless, there is now little slack in the global economy, and policy rates are likely to tighten further, even in the face of rising geopolitical tensions.

From the perspective of growth alone, the outlook is still quite positive. US data in particular shows meaningful domestic strength and European growth is also coming back strongly, after weakness earlier in the year. Japan, too, should see some better months ahead after weather-related disruption.

The principal issue in the global economy is vulnerability in some parts of emerging markets, albeit mostly outside Asia. This is being exacerbated by a strong rebound in the US dollar, prompting contagion fears and dampening sentiment. Weighed against this is China’s undoubted ability to counter economic weakness with further rounds of stimulus, should it choose to do so.