1. Signs of progress on trade, but not enough.
The US and China agreed in principle to a partial trade deal on 11 October, offering a clearer pathway to de-escalation. China agreed to purchase up to 40–50bn more agricultural goods from the US, the increase in US tariffs from 25% to 30% scheduled for 15 October was postponed, and negotiations on completing a phase 1 deal will continue. But a number of issues were either left unresolved or unclear. Scheduled December tariffs were not delayed, restrictions on Huawei were not addressed and will be treated separately. Provisions on intellectual property, forced technology transfer, and Chinese state subsidies are still unclear. Not enough was achieved to alter meaningfully the fundamental global economic outlook, in our view. Global growth is still slowing and is below trend; we forecast growth at just 3% next year, the slowest pace since 2009. There is still scope for earnings disappointment and the remaining uncertainty from trade tensions means business investment is unlikely to improve markedly.
Takeaway: We maintain an underweight to equities. We will be looking for signs of progress on unresolved trade issues and a response in the economic data that might lead us to reassess our positioning.
2. Gold still has further to run.
Gold prices traded back above the USD 1,500/oz mark last week after the US blacklisted certain Chinese tech companies and China said to “stay tuned” for a retaliation. Global gold-bullion-backed ETFs are also experiencing their longest run of inflows in a decade according to data compiled by Bloomberg. Gold prices eased back after the US and China made modest progress in trade talks, but the drivers behind its recent rally remain in place. The global economy is slowing; our estimate of 3% suggests the weakest pace of growth since 2009. We expect US real rates to decline (from 0.18% currently to –0.56% in March 2020) as the Fed continues to cut rates, making the precious metal attractive on a relative basis. If last week's partial trade deal marks the path to a complete de-escalation in tensions between the US and China, we could see gold come under pressure again. But, for now, trade remains uncertain and other geopolitical tensions – Brexit and impeachment – are also likely to persist, increasing the appeal of safe-haven assets.
Takeaway: We forecast gold at USD 1,550/oz at the end of the year and USD 1,600/oz at end-1Q20.
3. Investing for a more secure future.
Ethiopian Prime Minister Abiy Ahmed won this year’s Nobel Peace Prize for his work on ending the 20-year war between Ethiopia and Eritrea. To coincide with the award, we recently published a report on how investors can support SDG16 – Peace, Justice, and Strong Institutions – as well as excluding companies that produce or sell weapons, or those involved in human rights abuses from their portfolios. We also consider integration strategies, in which investors can choose companies that manage human rights issues in their value chain, promote transparency, and avoid corruption and bribery. This could help de-risk a portfolio and identify potential growth opportunities – including the industries we have identified in our longer-term investment theme “Security and safety.” The proceeds from green bonds can also be ring-fenced in projects that support SDG16. For a higher impact approach, we also suggest seeking engagement-focused strategies that encourage companies in high-risk markets to support stronger national institutions.
Takeaway: Sustainable investing allows you to align your investments with your values without having to greatly sacrifice your returns.
How will investors respond to earnings?
How will investors respond to earnings? 51 companies in the S&P 500 are set to report their 3Q earnings this week – and with global growth slowing amid rising geopolitical uncertainty, a positive surprise would be welcomed by markets. We see earnings dropping by 2%, the first quarterly contraction since 2016. We maintain a preference for the US consumer discretionary, communication services, and consumer staples sectors.
Will the UK be forced to delay?
If a Brexit deal is not agreed by 19 October, by law the UK government will have to ask the EU for an exit extension. Last week UK Prime Minister Boris Johnson and Irish Prime Minister Leo Varadkar agreed they could “see a pathway possible to a deal,” suggesting greater willingness from both sides to look for common ground. Our base case remains for an extension and an election, which should lift the pound and we prefer it versus the US dollar.
Will hard data match sentiment?
Recent manufacturing PMI data has been weak, coming in at 48.9 for Japan, 47.8 in the US, and 49.8 in China. The three countries are set to report their industrial production for September this week, and confirmation of a marked slowing in activity could weigh on appetite for risk assets. We maintain an underweight to equities, favoring carry strategies.