Friday, 17th of May 2019
“Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedies.”
– Ernest Benn
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It has been a rollercoaster ride in markets this week. Last Friday, the US hiked punitive tariffs from 10% to 25% on the $200bn worth of Chinese goods targeted last year and threatened an additional 25% tax on the $325bn of Chinese goods that currently enter the US ‘tariff-free’. China has since hit back with a 25% tariff of their own, on $60bn worth of US imports, scheduled for 1 June.
Although the Trump Administration had been threatening this move for months, and only delayed the hike when they saw the Chinese negotiating position begin to shift back in March, the sharp escalation in trade tensions a fortnight ago took investors by surprise. Most had allowed themselves to become convinced that US and Chinese negotiators were on the verge of making a substantial trade deal, and a positive outcome to the talks was more or less priced. A small number of investors were pessimistic (and have since taken credit for ‘predicting’ the impasse) but, in truth, the closed-door nature of these negotiations means no one really knew what would happen. The market eagerly awaited any tit-bits thrown out by US or Chinese officials, while overanalysing every tweet, rumour and handshake, no matter how inconsequential. The result was unrealistic expectations which politicians failed to meet.
Nevertheless, can you really blame investors for their laser-like focus on the negotiations when so much is at stake? Chinese growth, already slowing as the country tries to de-lever in an orderly manner, has clearly suffered from the barrage of US measures since early last year. Short-term stimulus measures taken in Q1 have helped temper worries (or perhaps just disguise the slowdown) but they are not the supply-side reforms that China needs to cure its addiction to cheap credit and avoid the middle-income trap that has befallen so many economies transitioning to DM status. A weaker Chinese economy has far-reaching implications for the prices of commodities and the stocks of emerging market and European companies. Meanwhile, even if the US economy has held up well – and we do not expect it to take a significant hit from the Trade War – the threat of escalation and uncertainty of trade policy has a chilling effect on investment the world over. For the past year and a half, the ups and downs in the US-China trade relationship have driven markets, and it looks like the downs may dominate for the next few weeks at least. There is little hope that new trade talks will break the stalemate soon – the optics of a sudden rapprochement suit neither side, given the latest volley of tariffs and accusations. And we are happy to have protected portfolios when options were cheap, and volatility was trending lower. Nevertheless, we believe that the fundamental backdrop of strong earnings and economic data, particularly in the US, continues to favour equities. A pull-back now should provide opportunities in the medium-term.
Elections to the European Parliament will take place next Thursday against a backdrop of slower global growth and rumbling uncertainty over the state of internal politics and external relations. Held every five years, the vote is often lauded by enthusiasts as a huge democratic exercise with few parallels. To be sure, only the Indian general election (which also happens to conclude on Thursday after several weeks of voting) polls a larger electorate. However, if you are not paying close attention to events, you are not alone. More than 400m people are eligible to vote, but fewer than half are likely to show up on the day. Since MEPs were first directly elected in 1979, voter turnout has fallen in every subsequent poll and has not climbed above 50% for a quarter of a century. Few EU Parliamentarians are well-known, even among their compatriots, and those who are widely recognised tend to have done stints in national politics. With one month to go before the election, a poll of German voters at the end of April found that 45% did not know any of the top nine candidates from the largest parties in the Bundestag, for example. Incredibly, only 26% were aware of the leading CSU candidate, Manfred Weber, who is also head of the EU’s largest Parliamentary grouping, the EPP, and the individual most likely to replace Jean Claude Juncker as EU Commission President when the Luxembourger retires.
The origins of political apathy are myriad and hard to decipher, but the limited appeal of a strong pan-European identity seems decisive: where national and EU interests collide, the former invariably trumps the latter for most Europeans, leaving a sense that EU politics does not really matter. However, other factors also contribute to the political malaise, including the Parliament’s weak legislative authority, the confusing and fractured system of parties and groupings, the technical nature of discussions, and the widespread ignorance of basic EU institutions and processes among citizens.
Irrespective of its roots, disengagement has transformed the European Parliament elections into a giant protest vote which tends to produce one of the most Eurosceptic and eclectic political bodies in the EU. However, the largest pan-European parties (the centre-right EPP, the centre-left S&D and the liberal LDE) will typically secure an overall majority and then choose to cosy up in a German-style Grand Coalition to the chagrin of many voters. This is the outcome that most people expect next week. But protest votes often produce upsets, and nationalist and Eurosceptic forces are polling strongly ahead of the poll. For a long time, populists such as the League in Italy, the AfD in Germany and the National Rally in France have been divided among several EU groups. But they have finally come together under an umbrella party, the Movement for a Europe of Nations and Freedom, which allows them to campaign on a shared platform and share resources and tactics. Farcically, having failed to execute Brexit in time, the UK will also take part on Thursday. Given the expectation that UK MEPs will remain in place for just a few of months, voters are treating the election as something akin to a re-run of the 2016 referendum and traditional parties are taking a hammering. Indeed, the upstart Brexit party – only a few weeks old – is expected to win by an ever-increasing margin. Even if the outcome of the vote is just another Grand Coalition, this election will be an important barometer of public opinion on the EU project and will give clues about the state of politics in member states as well. We will be watching closely.
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