Global stock markets have suffered several shocks since March this year as politics between major economies such as the US, China and Italy, take their toll on investor confidence.
“Geopolitics I think is the buzzword for this year,” says AMP Capital’s Chief Economist and Head of Investment Strategy, Shane Oliver. “It’s certainly having an impact on markets.”
By geopolitics, Shane is referring to decisions that are made at a political level, often between countries.
The biggest threats to trade have come from the US, where President Trump has imposed tariffs on steel and aluminium and is threatening tariffs on Chinese imports.
The situation has left many countries, companies, and investors in fear of a global trade war.
A recent survey showed the outlook among CEOs of large US companies had fallen with a majority expressing concern about the US administration's trade policies, according to the Business Roundtable Survey.
“There are ongoing fears of a trade war and I think ultimately that’s going to be avoided but it is going to be a close call,” says Oliver.
“The risks are significant because we’ve seen in the 1930s that when countries like the US start putting big tariffs on their imports, then it leads to a grinding down in global trade,” he says. “We certainly don’t want to see that occur, and markets have been fretting about that.”
On top of the concerns about US trade policies, there are renewed concerns about the future of the Eurozone because of the unstable political situation in Italy.
The populist left-leaning Five Star Movement (5SM) and populist far-right Northern League (NL) were the big winners in the Italian elections in March. The two parties have attempted to form an unlikely coalition government.
The two parties have proposed, amongst other things: big tax cuts (with just two rates of 15% and 20% for companies and individuals); a basic income for the less well-off; a roll back of pension reforms; and a review of European Union budget rules.
“We’ve seen worries about Italy, worries that a new populist government will ultimately take Italy out of the Euro,” says Oliver. “I don’t think that will happen because a majority of Italians support staying in the Euro. Also, they can see that Greece found a few years ago getting out of the Euro was very hard to try to do, but that’s going to be another source of volatility until the current uncertainty is resolved.”
On top of these potential trade issues, Oliver points to the investigation into the relationship between the Trump campaign and Russia during the last US presidential elections, currently under investigation by Special Counsel Robert Mueller.
“The Mueller enquiry seems to be going off in all sorts of directions that at some point could ensnare President Trump and that results in all sorts of political risk in the US,” he says.
And then finally there is growing controversy surrounding ownership of the islands in the South China Sea, where China is asserting its ownership.
“These factors are all causing uncertainty and volatility in markets,” he says. “At the end of the day though, if the global economy continues to grow at a good pace, that supports profits and share markets should be able to ride through it, albeit with a bit more volatility than normal.”
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