As a tumultuous quarter came to a close last week, almost all investors we met were in unwind mode – selling equities and shifting into sectors and regions perceived to be more defensive. As we have messaged many times over the past 6 months, the global cycle is certainly ageing, which should prompt more volatility. However, in our view, without President Trump’s harsh trade and foreign policy rhetoric, underlying conditions would still be resilient enough to support markets. The POTUS has certainly therefore made his mark. Last week this continued as the Trump administration’s efforts to stop all nations from importing Iranian oil contributed to a sharp appreciation in the commodity’s price (a large draw in US inventories also signalling a tightening market).
Elsewhere, global M&A volumes hit an all-time high during the first half of 2018 – amounting to USD 2.5trn compared to the previous high in 2007 of USD 2.3trn. After wild returns for fixed income managers in May, the best quarterly performance for the USD since 2016 and US corporate bonds posting 2 consecutive quarters of negative returns for the first time since the crisis, this has many investors talking about “echoes” from previous bear markets. Whilst we have been cautious on the long-term prospects for developed markets ever since the crisis, we don’t believe this is yet a foregone conclusion. Of course, if the trade war does not de-escalate, the impact of threatened tariffs on all sides would be very material and could plunge the global economy into recession. If instead more balanced agreements can be found over the next few months, markets may have already discounted enough for the time being.
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