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All eyes on Osaka

Tom Stevenson

Tom Stevenson - Investment Director

It’s been many years since I was an English teacher in Osaka. Back then, no-one had really heard of Japan’s second city. It was definitely the unfashionable end of the Tokyo-Kyoto-Kobe corridor, better-known for its excellent food and focus on making money than its culture or architecture.

All eyes on Osaka

This weekend, however, the world’s eyes will be on Osaka thanks to its hosting of a make-or-break meeting between Presidents Trump and Xi. The breakdown of trade talks between the US and China in May cast a long shadow over financial markets while recent hopes that a deal might be rekindled this weekend have seen the S&P 500 hit a new all-time high.

Trade tensions stand alongside US interest rates as one of the two biggest influences on markets today. The ebb and flow of sentiment on these two issues has been the key driver of risk appetite in recent months.

Expectations have been played down ahead of Saturday’s planned meeting. A recent survey by Bank of America Merrill Lynch found around two thirds of investors predicting no big announcement of a deal this weekend but no new tariffs either.

Hopes are high, however, that the two Presidents will smile and say flattering things about each other, shake hands and confirm that negotiations are to be re-opened with a stated goal of striking a deal by the end of the year.

Investors think the summit will be a key determinant of the outlook for the global economy during the rest of 2019, the direction of markets in the second half year and, crucially, indicate what the next move for the Federal Reserve and other central banks might be.

If things go wrong and there’s no handshake, the pessimistic view is that the world could be heading for a mild recession. Signs of an early deal, on the other hand, could see markets lift off from their current holding pattern.

Even if there is no escalation of tensions, it’s worth remembering that tariffs are already in place on $250bn of Chinese exports to the US. The impact of those levies is already starting to show up in the data. Shipments of goods in the initial $50bn of exports targeted by the Trump administration were almost 30% lower in the first four months of 2019 and those of goods in the next $200bn tranche have started to follow suit.

The knock-on impact of trade tensions has also been felt in lower consumer confidence and less business investment.

The good news is that both sides probably want to strike a deal at some point. The pressure is not on just yet, but with the US Presidential election just 18 months away the clock is ticking for Mr Trump. The prospect of an economic slowdown jeopardising his re-election prospects will more than likely see the US President strike a more accommodating tone in due course.

In China, the need to keep the Chinese economy on track will guide President Xi although it would be unwise to underestimate the willingness of the Chinese people to accept a bit of economic pain in preference to what they perceive to be an attempt at humiliation by their principal strategic competitor.

For the time being, the pressure has also been taken off by a much more emollient Federal Reserve. The prospect of lower interest rates has put a floor under the stock market, providing the President with cover to take a harder line.

No-one should imagine that trade tensions are a flash in the pan that will be sorted out over one ceremonial meeting this weekend. China and the US are engaged in a multi-decade battle for supremacy and trade protectionism is just one element of that fight.

What does this mean for investors? The likely implication of the ongoing face-off between China and the US is continuing uncertainty and that in turn means the outlook for markets will remain unclear and volatile.

The two presidents saw eye to eye in Argentina at the end of 2018 but that did not stop tensions flaring again within months. Whatever happens in Osaka this weekend no-one should kid themselves that we are out of the woods just yet.

That argues for a cautious approach to investing that balances growth fears with a more positive environment of central bank stimulus. This is not the time to make big bets either way. Rather there’s a strong case for a well-diversified portfolio, spread across different asset classes and around the world’s different regions.

Investors who prefer to let an expert take care of their investment strategy and asset allocation could do worse in these circumstances than to consider the Fidelity Select 50 Balanced Fund. Run by Ayesha Akbar this multi-asset fund picks a diversified selection of funds from our Select 50 Best Buy list.

It aims for long-term capital growth with a minimum of volatility. That’s an appealing combination in today’s uncertain world, almost as comforting as a plate of Okonomiyaki - Osaka’s favourite dish.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.