Chess Moves

Apr 06, 2018 | Dian Chaaban


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It may or may not surprise you that I was on the chess club in elementary school. I used to also prefer playing chess against my computer over playing sports with the other kids…which really explains my terrible hand-eye coordination now as an adult.

 

Embarrassing childhood confessions aside, I often found that when I took my time to calculate each move, I would win (beating the computer doesn’t sound as cool now that I say it aloud as I used to think it was…) but if I hurried though each move, I’d lose – every time. Hasty decisions aren’t methodical. They don’t consider possible outcomes and only focus on the next move – rather than strategizing 2-4 moves ahead.

 

The US & China trade spat feels a little like a hasty chess game to me. Oil prices fell about 2% today after President Trump threatened new tariffs (again) on China, ordering U.S. trade officials to consider tariffs on an extra $100 billion of imports from China, escalating tensions with Beijing. China retaliated today warning they are fully prepared to respond with a “fierce counter strike” of fresh trade measures if the United States follows through on Trump’s threat.

 

My team and I are watching these chess moves closely for any signs of it turning into a bigger issue, thereby impacting the growth and earnings trajectory (more on that below). We believe the market may be extrapolating a higher probability of a full-out trade war than we believe is warranted. It is worth noting that this chess game is far from over; the tariffs announced yesterday by the U.S. and the retaliatory tariffs unveiled by China on Wednesday will not be implemented immediately. The U.S. tariffs are subject to a comment period lasting through the better part of May after which the administration has a minimum 180-day window to decide whether to actually proceed with implementation. For China’s part, they seem to be taking their cue on timing from the U.S. Furthermore, as Tom Porcelli at RBC CM Economics has reminded us on more than one occasion, it seems unlikely the U.S. administration would seriously push an agenda that would materially impact U.S. growth (and run the risk of completely offsetting all the work they accomplished on taxes).

 

For those looking for more thoughts on the trade spat, I would point you to the most recent April edition of the Global Insight Monthly here.

 

The world we live in today often sensationalizes the average news story. And so it is more likely than not that you are hearing, reading and talking about the volatility that has returned to the markets in 2018 and the “correction” that has taken place thus far (though, with the exception of Canada, some of the major global equity markets haven’t fared too badly year-to-date).

 

YTD Performance in Canadian dollars (as of yesterday’s close):

  • S&P/TSX: -6.3%
  • S&P 500: -1.1%
  • Euro Stoxx 50: -2.4%
  • Nikkei 225: +1.7%
  • MSCI Emerging Markets: +3.4%

While we acknowledge that the threat of trade wars is cause for concern, we believe it is easy to lose sign of the fundamental backdrop for equity markets, which remain favorable for now, in our view. Here are a few of the key messages we continue to focus on:

  • Solid global economic growth in virtually most key parts of the world and leading indicators that confirm more to come
  • Global monetary policy remains accommodative, though less so than in recent years with Federal Reserve tightening
  • Robust global earnings growth expected for 2018 – double digit in the case of the U.S. (aided by tax reform) and Emerging Markets, and nearly 10% in Canada and Europe
  • Inflation that remains contained for now
  • Minimal near-term risk of U.S. recession based on variety of indicators

It’s still too early to tell whether this will simply be a trade spat or turn into a more meaningful trade war but protectionism will remain in the foreground. As always, my team and I will continue to monitor the changing macro environment and potential implications for your investment portfolio – in addition to making sure that your wealth management plan is on track. If you have any questions as to how your current investment portfolio is positioned, or if would just like to chat further on the topic, please do not hesitate to call me directly any time.

 

Now you are in-the-know with Word on the Street.

 

Enjoy your weekend,

 

D.


Dian Chaaban
Investment & Wealth Advisor
416.842.4234