7 to 13 August: Bull in a China Shop

Early this year (23rd Jan) we suggested “politics is likely to prove an increasingly important determinant of relative performance across asset classes, sectors and regions”. Indeed, as it relates to the US, we later commented (18th April) that “it’s started to look like President Trump will struggle to generate any real change domestically…the US President might switch his attention to geopolitics.”

With respect to the first statement, we have probably not yet been proved accurate; overall global growth momentum has continued to float almost all boats. Nonetheless, there is still notable political risk. For example:

• In Japan, the declining popularity of Prime Minister Abe is sowing the seeds of an end to “Abenomics” (a policy set which has been an abject failure, particularly because of weak implementation but in our view also by design). This has prompted JPY strength and could soon refocus investor attention on how to address an economy with over 250% Government debt to GDP and a potential growth rate (highest sustainable GDP growth rate) of only 0.75%.
• In the UK, Brexit negotiations rumble on with no clear progress. Theresa May’s leadership has so far been found lacking and, as a consequence, the country risks continued uncertainty and the potential loss of its key financial centre status.
• In Emerging Markets, both South Africa and Brazil have been hamstrung by political scandal and bureaucracy. Whilst Jacob Zuma survived last week’s vote of no-confidence, ANC elections in December could herald a change in leadership that can unleash the country’s potential. Similarly, despite the scandal surrounding Michel Temer, Brazil looks likely to pass social security reform, which would stabilise the budget and allow the country to monetise the tailwinds of declining interest rates and resurgent industrial production.

With respect to the second statement, on Tuesday, Trump broke the market from its summer slumber by stating the US would “deploy fire and fury like the world has never seen” if North Korea did not give up its nuclear programme. Two days later, he added that he “may not have been tough enough”. North Korea responded by announcing it was planning to target the waters surrounding the US territory of Guam with 4 missiles by “mid-August”. The US’ top military official (Chairman of the Joint Chiefs of Staff General Joseph. Dunford) is scheduled to meet with the leaders of US Forces Korea and the South Korean President Moon Jae-in later today.

Trump also set his sights on Venezuela, commenting “The people are suffering and they are dying. We have many options for Venezuela including a possible military option if necessary.”

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