The new US president’s economic nationalist rhetoric has fanned concerns about rising protectionism slowing global trade and hence hurting prosperity and growth for all involved. We acknowledge that risk and will monitor it for potential investment implications. For now, however, we must note that markets are signaling a much brighter future for profitable trade among nations.
US President Donald Trump is considered an ardent protectionist. His inaugural address confirmed the key “America first” message of his electoral campaign. As promised in December, he has declared the formal US withdrawal from the planned Transpacific Partnership (TPP) and officially notified Canada and Mexico of his country’s intent to renegotiate the North American Free Trade Agreement (NAFTA), which has been in force for more than two decades. Companies wishing to sell their products in the US would have to either manufacture them locally or pay tariffs.
In Europe too, free trade, globalization, and even the European Union itself, are being increasingly challenged by various political forces. Transatlantic trade and investment agreements such as the TTIP and CETA are unpopular. Not few observers are consequently warning that an era of protectionism is dawning. If such on outlook were credible, it would of course weigh on financial markets in some form - at the very least, it should lead to a noticeable investor preference for assets that benefit from inward-looking protectionism, relative to assets that profit from outward-looking trade. However, none of that is the case in markets at present.
Financial markets signal growing world trade
The market signals are very clear. Although the initial enthusiasm has moderated somewhat since December, share prices, interest rates, and commodity prices are still trading significantly higher than on US election day. The emerging markets also continue to perform well in most cases (see table, page 3).
More interestingly, however, the merchant marine subsector, which is arguably most reliant on growing global trade, has been among the leaders of the post-election rally: the MSCI All-Country Marine Index has surged by nearly 14% in US dollars since the election, beating all main MSCI sectors, as well as US small caps, which were widely seen as the typical beneficiaries of US protectionism (see page 2).
Optimistic Swedish purchasing manager surveys
In addition, it is not just financial investors who expect global trade to pick up. The purchasing managers’ surveys (PMIs) have generally been steadily improving around the globe over the past year, and that trend has generally persisted since the election. But the most notable increases in the PMI readings were registered in the export and production sectors of Sweden. The latter is of potential relevance because Sweden is a small but very open economy (gross exports account for 45% of economic output) that is particularly sensitive to expected fluctuations in global trade.
Given such clear signals, we should beware of hasty conclusions about a rising anti-globalization tide. Of course, investors and business managers may still be proven wrong in end. But even if it is hard to believe in the face of the currently dominating negative headlines, we should also be aware that markets tend to cut through the noise and focus beyond the apparently obvious.
Thus, the latest trends can also be explained as follows: the anticipated increase in global economic growth could ultimately simply outweigh the impact of higher tariffs and trade barriers. Furthermore, he popular votes in favor of Brexit and Trump might have also triggered a global political process that could ultimately bring the global economic order more in line with the preferences of the citizens of most major economies - and thus contribute to a more stable and hence sustainable international trade regime.
Note: The next LGT Beacon will be published on 22 February 2017.