Reasons to worry

The global economy is slowing down and investors are seeing less and less days to cheer about markets. In early 2018, markets did not have to celebrate a partial trade agreement with China or rally on signs of the U.K. striking a deal with the European Union; the global GDP was growing at 4.7% at the start of 2018, which slowed down to 2.2% in the third quarter of 2019.

The IMF’s new boss, Kristalina Georgieva, sees a “serious risk” the slowdown will spread, and it’s likely to cut its 2019 global growth forecast from 3.2%, already the weakest since 2009.

We at Acinox are talking about reasons to worry as we invest in a highly volatile market.

Trade Wars

US and China trade wars has already put global growth under pressure. There was a recent breakthrough with Beijing signing up to buy more American farm products and the White House suspending another round of tariffs. But the most crucial disputes around intellectual property theft, forced technology transfers, and Chinese industrial subsidies remain outstanding. China is one thing, Trump could also impose levies on the EU auto manufactures which are already seeing a slump in growth.

Malignant Manufacturing

Undoubtedly manufacturers have been the biggest trade-war victims, and global activity has contracted for five straight months. The automobile sector (a key for German and Japanese economies) has been the most hit. We are seeing businesses are cutting back, and U.S. non-residential investment shrank in the second quarter for the first time in three years. The question is whether the pain at factories infects services, adding another element to the slump.

Geopolitics

Things were already heated with the U.S.-China skirmish, and the U.K. and EU Brexit debate, but now we also have the U.S. at odds with Iran once again after the drone attack on Saudi Arabian oil fields and an Iranian oil tanker catching fire after an explosion near the Saudi Arabian port of Jeddah, which risks a jump in oil prices. Otherwise, protests in Iraq continue to stay violent, Turkey has gone on the offensive in Syria, while marches in Hong Kong might top the country into recession. It doesn't end there, as you have Argentina facing another fiscal crisis, while Ecuador, Peru and Venezuela also have political problems. Lastly, Trumps impeached and 2020 US elections on the horizon only adds fuel to his anti-globalization agenda.

Crunched Profits

Business are looking pressured as global profit growth stalled in the second quarter, leading to cutbacks in capital spending worldwide. Rising worker wages combined with flat productivity growth and lack of pricing power has crunched the bottom line. The danger is that profit-pinched corporations will next take the chop to their work forces, knocking consumer confidence and spending for a loop.

Central Banks Dilemma

Monetary policy may be easier than at the start of the year, but central banks are going into this battle lacking the ammunition. The Federal Reserve has cut its benchmark rate by about 500 basis points in all three recessions since the early 1990s, yet it began this year with only half that amount available. The European Central Bank and Bank of Japan are already running negative rates with doubts about how much further they can go.

Confused Governments

The IMF is among those urging governments to loosen budgets and although Morgan Stanley estimates the primary fiscal deficit has risen to 3.5% of gross domestic product in major economies from 2.4% last year, it sees it increasing only to 3.6% next year. Some governments are spending more, but China and Germany, both of which have room for fiscal stimulus, are holding back and Japan just raised its sales tax.

S. Khan

Head of Investment Research