Despite rising geopolitical tensions and talks of trade war between the US and China, Fidelity’s chief investment officer (CIO), Paras Anand, said the economy has continued to outperform the expectations embedded in the bond market.
Anand said while there was always the risk of complacency when it comes to geopolitics, it was hard to believe the “hawkish language” on import tariffs proposed by the Trump administration was not wholly politically driven.
“In the context of the broad US economy, even a successful renaissance in those sectors deemed to be most impacted by foreign ‘dumping’ would barely move the needle in terms of overall performance of the US economy,” he said.
“However, with the mid-term election on the horizon, Trump will be keen to secure the blue collar vote, which is at risk of slipping as his most ‘successful’ policy initiative to date (tax reform) has benefitted Wall Street far more than Main Street.”
Anand said the fact that the global financial system was much better capitalised and less interconnected has limited the extent to which geopolitical events could trigger “shockwaves” as they did immediately after the global financial crisis (GFC).
Taking a benign view on the current geopolitical environment shouldn’t make investors enthusiastic buyers, according to the CIO.
“If I am right that the economic consequences of recent headlines will be lower than people believe then it will be hard for central banks not to respond with tighter liquidity conditions and consequently a greater differentiation between asset prices.”
“The surplus liquidity in the system means that we are unlikely to see a prolonged bear market but the recent volatility that we have endured since the start of 2018 may remain with us.”
Anand said that shares were more likely to be moved by specific events, for example the Cambridge Analytica and Facebook scandal, rather than the broader geopolitical or macro environment.
“In most market environment environments, this is normally the case but it is easy to forget when we have been through an extended period where the opposite has been true,” he said.
