Monthly economic update with MLC, July 2018

Funds Management

by Clive Tompkins

MLC’s Senior Economist Bob Cunneen and Portfolio Specialist, Sinead Rafferty discuss the latest market movements across the world, concerns over the trade wars between the US and China, and the impact that the current process of escalation and retaliation will have on the global economy.

Welcome to this month's economic update. I'm Sinead Rafferty, portfolio specialist at NAB Asset Management. And I'm joined by our senior economist Bob Cunneen. Welcome Bob.

Bob: Thanks Sinead.

Sinead: Bob in recent weeks, we've seen the US impose protectionist measures, and now the Chinese have responded. Can you give us an update on that?

Bob: Yes. So, President Trump announced tariffs on selective Chinese imports. Particularly electronics and machinery. And that 25 percent tariff was going to start applying from July 6. President Trump has also threatened additional tariffs on another 500 billion of Chinese imports. Now, at this stage, China has only retaliated for the first 34 billion or so. But what we've got, what is particularly at risk, is this escalation and retaliation across the world, to what America is proposing. And because of that, it's a key threat to the global economy.

Sinead: And, we've seen the implications of that in terms of how markets have performed over June, and the Chinese SSE composite for example is down eight percent, and other emerging markets are also down over the month. Is that driven by these trade wars?

Bob: Yes, definitely. So, what we're seeing the Chinese share market is basically the epicentre of these concerns about the trade threat. So, the Shanghai market was down eight percent, and if you went even to Hong Kong, which typically is a more resilient share market, it was down five percent. And running across the board, Korea, Thailand, all suffered weakness because of the concern is that their exports to America will be shut down or will be penalised by these higher tariffs.

Sinead: And that contrasts with the performance of some other developed markets which broadly speaking did okay?

Bob: Yes, so America's market was up about 0.6 percent. And they are not particularly concerned about this tariff issue. There is still the view that the US corporate profit story is quite robust, plus 20 percent gain in terms of profits for the year to June is the expectation. Plus, also the Trump tax cuts has also helped corporate sector in particular. So that's isolated America for now. But what we have to bear in mind is a lot of American companies have global supply chains. So, they source from both China and Europe for some of their imports. So, they will eventually be sensitive to this tariff issue.

Sinead: What about the Australian share market, how did that perform?

Bob: Well, the Australian share market was quite resilient. It actually made a gain of 3.2 percent for June. So what you saw was very robust performance from the energy sector, in particular it made very strong gains with rising oil prices. Also, saw the information technology sector do extremely well, it made a 7 percent tight return. So, that's very much encouraging for the Australian share market. Against that, the telecommunications sector continues to struggle.

Sinead: What about the Australian dollar? It's fallen considerably over the last year or so, and slightly further over the last months. So now down at US $0.74 cents, and is that driven by this risk off kind of attitude?

Bob: It is very sensitive to the China story. So, if China is being penalised in terms of its export performance, then potentially it has negative implications for Australia in terms of our iron ore and coal exports. So, because of that, the Australian dollar is a little bit of a barometer for that China concern. And when China is under pressure, the Australian dollar typically falls. And that's what we're seeing at the moment.

Sinead: Thanks for your time, Bob.

Bob: Thank you, Sinead.

Sinead: And thank you for joining us. If you'd like further information, it's available on the website, where you launched this video.