Tension between the United States and China could be the dominant theme impacting on sentiment in financial markets for the next decade and the world could be witnessing the start of an economic cold war, warned UniSuper’s chief investment officer John Pearce.
After Treasurer Josh Frydenberg called on more companies to invest their retained earnings to support economic growth, investment managers and economists at the Financial Services Council leaders’ summit in Sydney said geopolitics is making companies reluctant to invest and they are worried trade tensions will continue.
“I do believe this is potentially the start of an economic cold war, if not a military cold war,” Mr Pearce said. “To get out of debt, central banks around the world have had to inflate – but the problem with trade wars is it makes their role so much harder.”
A live poll of the 300-odd delegates at the event, many of whom are professional fund managers, showed more than half consider US-China tensions will still be an issue for markets in ten years’ time.
“There is a perception this could be a cold war, when you look at what is going on in Hong Kong, Taiwan, and the South China Sea, and cold wars take a long time to go away. So you can make an argument this will still be around in ten years time,” said AMP Capital Investors chief economist Shane Oliver.
NAB Asset Management and MLC chief investment officer Jonathan Armitage said the trade war between the US and China is the issue that could do the most damage to markets. “That absolutely will impact future earnings and however this plays out, it’s inconceivable to think that some more medium term damage hasn’t been done in terms of economic ties,” he said.
Similarly, investors expect Brexit to permanently shift the economic dynamics between the UK and the rest of Europe. Consumer and investor sentiment is worryingly “fragile”, Mr Armitage said, and following the first missed deadline for Brexit, people’s spending habits changed noticeably. “It wasn’t quite guns and baked beans, but there was a definite shift.”
Blackrock Australia chief investment officer Michael McCorry said he is looking at the cumulative effect of tariffs on different countries, industries and companies. “The longer it goes on, the more it’s going to impact markets,” he said. “We’re thinking about what it means for the industries we invest in and where we allocate risk.”
Mr Pearce said it is concerning the Democrat party in the US appears to support the tougher line on China. “In America now, this whole tariff thing is not just about Trump, there is bipartisan support for an anti-China stance. Trump has a very bombastic way of going about it, but there is bipartisan support for the approach and even if the Democrats get in, I am quite pessimistic,” he said.
Exante Data’s head of Asia Pacific, Grant Wilson, said the trade war could trigger a bifurcation of technology supply chains, if the US and China prevent their companies doing business with companies from the other side. “One of the domino effects of this hardening is it is going to have a big impact on globalist ambition which has been taken for granted,” he said.
Dr Oliver said the government’s tax cuts may not provide enough stimulation to the economy, and while the Reserve Bank might consider “unconventional” monetary policy, “at end of the day, there is a role for fiscal policy, not the endless cutting of interest rates, and I wouldn’t want to see negative interest rates: that could panic people.”