Monthly economic update with MLC, April 2018

Funds Management

by Clive Tompkins

MLC Senior Economist Bob Cunneen discusses latest market movement, trade wars and their implications for economic growth with MLC's Portfolio Manager Myooran Mahalingam.

Myooran Mahalingam: Hello my name is Myooran Mahalingam, Portfolio Manager global equities and listed property. It’s my very great pleasure to welcome Bob Cunneen, Senior Economist. Welcome Bob.

Bob Cunneen: Thanks Myooran.

Myooran Mahalingam: In the month of March, some solid economic data coming through, yet stock markets fell around the world?

Bob Cunneen: Yes that’s right Myooran. So in terms of the economic data itself, we had very encouraging business and consumer surveys, solid jobs growth. So that suggests that the unemployment rates are continuing to come down, that’s positive. However, global share markets have been particularly concerned about trade conflict, between America and the rest of the world.

Now it started off with President Trump, he mentioned the phrase: trade wars are good and easy to win. So what he means by trade wars is raising tariffs on imported goods into America, from the rest of the world. So if we think about computers, television sets, cars, what the American administration wants to do is raise the price, so as to reduce the demand for these imports, from the rest of the world.

Myooran Mahalingam: Now are trade wars really good, because if you get a retaliatory effect from one country to another, doesn’t that have a more pessimistic outlook on economic growth?

Bob Cunneen: It does, so it damages both economic activity in terms of growth, but it also raises prices. Because when you put a tariff on an imported good, you actually raise the price. And by doing so, you raise inflation and therefore, put upward pressure on interest rates. So this has implications, not only for economic activity, but also for share markets as well. And this is why the global share market, we saw a fall of 2.3 per cent for March, but we also saw a sharper fall in Australia. Our market fell by 3.7 per cent in March itself.

Myooran Mahalingam: Shifting away from trade wars, the US Federal Reserve, the Central Bank of the US, they met in March?

Bob Cunneen: Yes and interestingly, they raised interest rates and that has been the policy that’s been in place, for the last year or so. And they’ve been steadily raising interest rates. They have taken the view that the American economy continues to strengthen, lower unemployment rates; higher wages indicate that the inflation risk is building in the United States. So hence, they’ve raised interest rates. However, the tariff story adds to the inflation risk and that may cause the American Central Bank to more aggressively raise interest rates, over the next year.

Myooran Mahalingam: So it’s a month where the data continues to be positive, yet the stock market still continues to be fairly cautious in terms of its forward-looking assessment of not only trade wars, but a lot of other issues as well?

Bob Cunneen: Yes, so from the point of view of economic growth, that’s a positive for corporate profits, but against that are the risks. The risks are with trade conflict, risk is also with interest rates in America and that adds up to a story that is potentially, a major negative for all industry.

Myooran Mahalingam: Bob Cunneen, thank you very much indeed for your time and thank you very much for joining us.