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Market Commentary - April 2018

24th April 2018

Free market economists have long espoused the risks that protectionist policies bring to the global economy; as each state responds the collective result is to lower global trade to the detriment of all parties. Historically, politicians have worked hard to promote their free market credentials but in reality, their policies have often fallen short of this utopian expectation. Ronald Reagan is perhaps one of the more controversial figures in this debate, having publicly called for more free trade while at the same time justifying policies that attacked the ‘dumping’ of Japanese cars on US consumers to the disadvantage of domestic industry.


In recent weeks, President Trump has reignited this debate with his attack on China in an attempt to rebalance the US trade deficit and in theory revive US industry. Such populist policy is at odds with modern economic theory, but politicians are incentivised to think in the short term, focusing on protecting the jobs of their electorate thus creating a natural conflict between philosophy and reality. In this regard there is likely to be some truth to the US Commerce Secretary, Wilbur Ross’ recent comment that, "the EU, China and Japan, all talk free trade, and they all practice protectionism".


The New Year began with all OECD countries seeing positive GDP expansion and economic indicators signalling further growth to come. Economic strength coupled with lower taxes, following sweeping reforms in the US, added fuel to corporate earnings momentum to drive stock prices higher with the MSCI All World Index up 4% in January, having risen significantly in 2017. Technology remained the leader of the pack with the Nasdaq rising 7.5%.


A confluence of factors, including extremely easy monetary conditions through persistently low interest rates and steady job growth with low inflation, had contrived to bring volatility of asset prices to historically low levels. These benign conditions created an environment of investor complacency that snapped in early February on the back of a marginally higher than expected wage inflation print in the US. A significant pullback ensued bringing with it an increase in market volatility.


The market quickly recovered only for the cracks to re-emerge in March as Trump revealed his protectionist intentions. This coincided with a correction in technology companies, triggered in part by the scandal surrounding Facebook, placing it and other consumer facing platforms in the cross hairs of both politicians and regulators. We have written extensively on the burgeoning risks to equities as valuations have risen and the cycle has evolved. So long as economic fundamentals remain robust, driving higher earnings growth, the preference for equities relative to bonds remains consistent.




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