The escalating trade disputes could – eventually – result in more open global markets, at least among strategically allied nations with similar interests. In the meantime, however, the U.S. approach to strong-arm its trade partners into making big concessions is likely to keep disrupting markets. We thus remain inclined to trim equities during rallies.
Amid escalating international trade tensions, U.S. equity indices eked out a third monthly gain in June, while most other markets retreated. More recently, equities have started to regain upward momentum and rebound globally, as China has decided not to formally respond in kind against the latest set of U.S. tariff threats for now.
Against this background, we note the following:
In short, the U.S. administration’s aggressive posture has increased uncertainty over policy and the outlook, which is clearly weighing on stock markets. Equity markets should normally be trading significantly higher in an economic environment as good as the current one.
Furthermore, the upcoming earnings season may distract from the trade war and thus offer an opportunity to trim equity exposure, particularly in the markets that are likely to be most negatively impacted by policy uncertainty and potential changes in the global trade regime.
We therefore remain inclined to use periods of strong stock markets gains to trim our equity position and raise cash in order to be better prepared to rebuild positions when the opportunity arises. We are upholding this countercyclical approach while maintaining our constructive but defensively-biased broader asset allocation.
Note: The next edition of the LGT Beacon is scheduled for mid August 2018.