The global economy, corporate earnings and equities remain strong, while political events signal monetary policy continuity. Furthermore, after having solidified their domestic positions just days ahead of the US president’s first tour of Asia, the leaders of China and Japan have moved to reengage diplomatically - and Asian markets continued to surge.
In this report, we offer a global macro update and communicate changes in our tactical asset allocation (TAA), as set following LGT Capital Partners’ quarterly strategy review in September.
Overall, market-friendly developments have remained dominant since our last report and we are staying the course, maintaining an overweight in equities against an underweight in fixed income, with a tilt in favor of Asia (see TAA overview, page 5).
Geopolitical tensions have eased. In Europe, Spain has ousted the separatist regional administration of Catalonia to restore the constitutional order and prepare for early regional elections. But events in Asia may prove of greater global significance, as they concern critical security and regional relationships among major powers. Specifically, the 19th Communist Party Congress in China and the 48th House of Representatives election in Japan strengthened the domestic standing of President Xi Jinping and Prime Minister Shinzo Abe, respectively. The former amassed personal powers unseen since Mao Zedong (see Special Topic). The latter comfortably defended a two-thirds majority for his coalition.
Following these processes and just days ahead of US President Donald Trump’s first official tour of Asia (graph 1), China then agreed to end a more than year-long dispute with South Korea over Seoul’s decision to allow the deployment of an advanced US missile defense system on its territory - a dispute that included unofficial economic sanctions against South Korean companies. In addition, Beijing, Seoul and Tokyo have also reportedly agreed to revive their trilateral summits before the year’s end. The last one had been called off after relations had soured due to current and historical issues, while South Korea was still reeling under its former president’s impeachment and dismissal process. In the meantime, all three countries have more stable and confident governments, while President Trump’s visit is expected to signal continued US-engagement in Asia. At the same time, all three East Asian governments now seem to agree on one key point: regional matters cannot be left to the US alone.
In short, the recent saber-rattling surrounding the Korean peninsula has not led to an escalation, but was instead followed by the emergence of more confident and stable regional leaders - all of whom have moved to reengage diplomatically on issues on common interest.
Note: The next edition of the LGT Beacon is scheduled for 13 December 2017.