The trade war between the United States and China is receiving a great deal of media coverage and undermining the global business climate.
Even so, trade between the two countries represents less than 1% of global GDP, according to IMF data. The decision by the Trump administration to postpone the application of a 25% tariff for three months affects only a tiny piece of the global economic puzzle. The end of the business cycle, which is far more important for corporate earnings and financial markets, has been shaping the global macroeconomic backdrop in recent months.
In the third quarter, the stagnation of the eurozone economy, abrupt slowing of investment in the United States, weak credit growth in China1 and much dimmer prospects for some technology companies confirmed this strong trend.
Moreover, the OECD’s composite leading indicator, which provides early signals of global economic activity, suggests that the slowdown will continue into 2019.
In our opinion, investors must look beyond the media noise and the sigh of relief that came at the end of the G20 summit, as postponing the U.S. tariffs will not be enough to turn the situation around.
For the time being, we maintain a defensive positioning because we think many investors will be surprised when the slowdown is borne out by economic data and earnings announcements at the start of 2019.
1- Sources: Third-quarter GDP according to Eurostat (stagnation of the eurozone economy), third-quarter GDP according to the U.S. Department of Commerce (abrupt slowing of investment in the United States) and the People’s Bank of China (weak credit growth in China).
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