Economic Outlook for July
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Economic Outlook for July

As Q2 2018 comes to an end, we are fast approaching the second earnings season of this calendar year. Before the deluge of corporate earnings reports arrive in July, markets have had little news to feed on. Into this news vacuum has stepped Donald J. Trump, President of the world’s largest economy, on a mission to escalate the simmering trade dispute between the US and the rest of the world. New tariffs have been proposed on US imports of Chinese and European goods, the first instalment of which will apply to Chinese goods, and is due to begin July 6th. So far, the rhetoric and proposed actions have done little to dampen global economic growth or confidence. But the rhetoric has been enough to spook markets, with the Chinese equity market most heavily impacted so far. Uncertainty as to the outcome of this dispute continues to fuel volatility in equity markets. The full ramifications could be marginal, a blip in the positive growth trajectory of the global economy. But they could also be significant if the dispute escalates into a full-blown trade war.

This is a risk worth monitoring. However, we continue to believe that a long-term investment strategy focussed on structural growth trends is relatively immune over long periods to short-term shocks. There may be more short-term volatility. Unforeseen events have a habit of happening. But remaining focussed on long-term changes in the global economy has consistently generated the best returns for investors over the long run, and this continues to be the best strategy to follow. Meanwhile, the US, Chinese, and European economies have continued to expand at a strong rate through Q2 2018. The US economy’s growth rate in particular appears to have accelerated in Q2 to new post-crisis highs. We expect a strong set of corporate earnings for Q2 across the major economic regions of the world, driven by a strong and growing global economy. Another set of strong corporate earnings numbers, continued positive guidance and further evidence of the strong underlying economy doing well, could be the jolt that the market (and the President) need to remind them of the futility of trade war escalation.

Macro Keeps Ticking Along

The latest macroeconomic data for the global economy continues to paint a rosy picture across the major economic region. In China, underlying activity continued to accelerate through May, with confidence indicators continuing to point towards strong expectations of expansion. The US economy continues to accelerate through Q2, retail sales data indicating growth pushed above +5% YoY, the highest growth rate recorded for more than a decade. In Europe activity levels remain robust and confidence indicators continue to support a view of high expectations of expansion across the region. Global economic growth drives corporate earnings growth. Corporate earnings and the expectations for growth in those earnings drive equity markets. A strong and growing economy is good for equity markets and will continue to support equity prices in Q2.

Trade Jaw-Jaw, Not War-War

The trade war rhetoric is turning into action, albeit still limited action so far. The proposed US tariffs on Chinese imports are due to be enacted on July 6th. The response from the EU and China has been muted so far, with only targeted proposals for tariffs on specific consumer goods like bourbon and orange juice, which will have more of a political effect in US states that export those goods (Republican voting Southern States). Trump has a track record of going big on rhetoric and waiting for his opponent to blink first. This still could be the tactic he is playing, and we could see a resolution.

The actual impact on global trade so far has been effectively zero. The current proposed tariffs, if enacted, represent a small proportion of total global trade volumes and would not have very much direct impact. However, if the current proposals go ahead on July 6th, then we will have moved away from rhetoric and in to real tariffs being imposed on goods traded between the US and China. Any escalation could then start to impact global trade volumes if the EU becomes involved in a more serious way. Big business in the US will almost certainly be lobbying behind the scenes to stop any escalation; trade wars are a lose-lose game.

This continues to be an issue that could have an impact in the future, but is not having any measurable impact on the economy now. Our latest economic data shows the US and Chinese economies are growing solidly, global growth overall is in good shape. We continue to monitor exposure in the Funds to an escalation of this risk and will adjust our exposures where necessary. Importantly: Our investment themes will continue to play out, trade-war or no trade-war. The structural growth themes we invest in are driven by fundamental technological, social and demographic changes which are unstoppable. With respect to the long-term outlook for our investment strategy at Dominion, this issue is unlikely to have any impact.

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The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Fund Management Limited. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.