Global economic and earnings growth remain strong and we do not see an imminent end to the upswing in the business cycle. But trade tensions have been increasing.
While we expect the disputes to ultimately be resolved before it could tip the world into a recession, we now expect things could get worse before they get better:
- Our base case, to which we assign a 60% probability, is for the US to complete enacting the 25% tariffs on USD 50bn of Chinese goods, introduce a 10% tariff on a further USD 200bn of imports from China, and levy duties on as much as USD 350bn of auto and auto-parts imports. We assume the Chinese will retaliate and may look to use non-tariff measures.
- We expect a relatively limited direct impact on corporate earnings growth – less than 5 percentage points on S&P 500 earnings that look set to grow by more than 20% this year. Since 29 May, when President Donald Trump announced the US was ready to proceed with the USD 50bn of tariffs, US equities are up by around 5% and global equities by around 2%.
- But the recent strength in stocks suggests markets appear not to be sufficiently pricing in the possibility of the situation getting worse, including potentially large second-order impacts, such as supply-chain disruptions, reduced hiring, lower investment, or a further escalation in the conflict.
To reflect this risk and to take advantage of the recent move higher in equities, we reduce the size of our overweight position in global equities in our tactical asset allocation this month. We are broadly balanced in our risk positions, comprising small overweight positions in global equities and in emerging market sovereign debt, combined with an overweight to US 10-year Treasury bonds. We are awaiting a reduction in trade risks, as well as monitoring growth and valuations, for signs the time is right to increase exposure again.
Please contact your financial advisor for UBS GWM CIO Mark Haefele's full House View Monthly Letter, "Tariff traffic," 19 July 2018.
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