The unpredictability of controversial US President Donald Trump continues to be a drag on financial markets, which are being put under pressure and conditioned by his out-of-control tweets.

The latest turmoil has been the threat of imposing tariffs on Mexico if the Mexican government does not tackle the immigration issue. This has continued to put pressure fears on market participants, despite the fact that it was recently announced tariffs would not be put in force.

However, we still believe that there are empathic propositions that will support financial markets in 2019.

Accommodative central banks 

Following the recent set of soft data, central banks continued their accommodative pledge based on the fact that the recent trouble continues to pile pressure on economic trends. Indeed, both the US Federal Reserve and the European Central Bank (ECB) continued to push towards a dovish tone. In fact, this was one of the support features for which markets reacted positively. As opposed to rate hike fears which pushed US Treasury 10-year bonds towards breaching the three per cent levels, this time round markets are cheering the probability of rate cuts, which continues to support an economic cycle despite the fact that we believe this may already be stretched.

The ECB is also being faced with adverse economic data, namely from the inflation front. Recent inflation figures showed that inflation dipped to 1.2 per cent, the lowest level since April 2018. Moreover, core inflation, an inflation measure which excludes food and energy prices and which central banks based their monetary decisions on among other factors, fell to 0.8 per cent.

We are of the view that both central banks will continue to be accommodative given this uncertain scenario. A more accommodative stance, which we concur with, will continue to be supportive for markets.

Patching of trade tensions 

Our base case scenario remains unchanged. A trade war deal will be struck. Despite the unexpected recent delays, pressures continued to increase on the impact of tariffs on economic growth. In our view, what changed this time round is the increase in bargaining power by the Chinese with respect to their US counterparts. We strongly believe that China has more fiscal and monetary tools in hand to combat tariffs.

The latest has been the threat of imposing tariffs on Mexico

A typical case in point was this week’s surprising trade surplus figures released from China. These figures are possibly also a reflection of the depreciating Chinese currency, which in turn reflects a more competitive export environment, thereby alleviating tariff implications on China. In fact, this reality is now pinching Trump, as in an interview released to CNBC he stated that the US is not on a level playing field against China’s weaker currency, which is ultimately nullifying the impact of tariffs.

Thus, it is now clearer that the US might be more sensitive to the trade-war delays, as it fears the impact of slower economic growth, given that the retaliation impact will ultimately hit US consumer spending which account for two-thirds of US economic growth.     

The stabilisation of growth in China

The economic slowdown in China has increased pressures on both the government and monetary politicians to act rapidly. We still believe that the Chinese government will do what it takes to continue to support its annual growth levels above the six per cent threshold, by being supportive in this regard.

Let us keep in mind that China is still the highest contributor towards global growth and it is expected to rise to 28.4 per cent from the current 27.3 per cent by 2023, while the US share is expected to fall from 12.9 per cent to 8.5 per cent in 2023, according to the latest data published by the International Monetary Fund. Thus, an economic power such as China should continue to feature markedly, even based on the demographic aspect. The latter is one aspect for an expansion in domestic demand which in turn should sustain mid-single growth digits.

China’s economic data has always triggered soundwaves across financial markets, and therefore the stabilisation aspect is an important element. 

A recession – not on the horizon

Despite many investment houses being vocal that the economy might be heading to a recession, there are many elements that probably contradict this view. Namely, despite the current imposed tariffs global growth for 2019 will be at the 3.5 per cent level. Secondly, given our base case scenario that the trade-war would be resolved, this will be supportive for possibly an upward revision in growth forecasts.

Ultimately, we believe that the support from leading central banks and the high probability of a trade war solution should offer benevolent returns for investors in 2019. That said, this does not mean that markets will not experience volatility. An important approach that should be taken by investors is to be patient and act rationally, cautiously and judiciously.

Investment decisions should be taken on fundamentals and on a more long-term view.

Jordan Portelli is an investment manager at Calamatta Cuschieri. The information, views and opinions provided in this article are provided solely for educational and informational purposes and should not be construed as investment advice, tax or legal advice. This article was issued by Calamatta Cuschieri Investment Services. For more information, visit https://www.cc.com.mt.