The trade tariffs – and corresponding retaliatory measures – implemented are so far limited. In total, the value of affected trade now amounts to about $150bn globally, or 0.8% of overall world exports. However, adding up all the measures currently under discussion and assuming impacted countries retaliate commensurately, the amount of targeted trade could quickly rise to more than $1tn, or 6% of global exports. In her latest Ahead of the Curve, Silvia Dall’Angelo, Senior Economist at Hermes Investment Management, argues an escalation of protectionist measures evolving into a trade war could represent the biggest challenge to the world economy.
A fully fledged trade war would act as a supply shock, resulting in lower global output and temporarily higher inflation. According to recent estimates, an out-and-out trade war would result in a 2-3% reduction of world GDP in the next few years.
In particular, the Organisation for Economic Cooperation and Development (OECD) estimated a 10-percentage point increase in trade costs – due to higher generalised tariffs – would reduce global output by 1.5% over the coming years.
The OECD scenario does not seem far-fetched. Assuming all measures under discussion are implemented, US duties as a share of import value would increase from the current level of 1.4% to almost 5%.
A warning from history
This would be well below levels recorded in the early 1930s, when US duties surged to 20% as a share of the overall import value and 59% of dutiable imports, following the introduction of the 1930 Smoot-Hawley Act. However, US duties as a share of the import value would likely increase to levels last seen in the early 1970s. In addition, given that retaliation would likely follow, the move would be largely mirrored at a global level.
US tariffs could increase to a 40-year high
Importantly, macroeconomic models probably underestimate the impact from higher tariffs and protectionist threats. In particular, they focus on the direct effects from trade limitations on trade flows and import costs, while they underplay indirect effects from uncertainty and tighter financial conditions.
Persistent trade threats point to protracted uncertainty on trade arrangements, which can weigh on business decisions about investment and hiring, via the confidence channel. It is possible these effects have already played out to some extent, which would partially explain the divergence in growth between the US and the rest of the world in the first half of 2018.
Trade offensive could backfire
Trade tensions have had no impact on the US economy so far, but the trade offensive could backfire. US growth is set to accelerate to about 3% in 2018, up from 2.2% in 2017, reflecting the boost from fiscal stimulus. However, the outlook for 2019 is more uncertain: an escalation of trade measures – driven by the US administration – has the potential to backfire, more than offsetting the positive impact from fiscal stimulus in 2019.
Meanwhile, the implications of a trade war on monetary policy are ambiguous. Central banks would need to set policies to balance the trade-off between reining in higher inflation and supporting faltering growth. Policy rates would likely stay close to the floor, implying the ‘loose for longer’ policy probably has years left to run.
Law of unintended consequences
Trade tensions have some broader long-term consequences that are hard to quantify. First, trade openness is typically associated with enhanced efficiency and, therefore, higher productivity. The increased integration of global supply chains in the last few decades has probably intensified this link. De-globalisation would put this process in reverse and the unwinding of efficiency-enhancing supply chains would likely have a negative impact on living standards by depressing productivity in the long term.
The situation might need to get worse before it can get better. Trade tensions are likely to persist in the run-up to the US mid-term elections in November. So far, the anti-trade rhetoric aired by the US administration has paid off in terms of political capital, but the strategy may be nearing its boundaries. First, because the additional measures would increasingly impact the US consumer, there should be a limit to which these threatened targets are translated into actions.
Second, and more importantly, the Trump administration may be pursuing a trade deal with China, which would be presented to the American public as a win before the mid-terms. However, the acrimonious exchanges between the US and China in recent weeks suggest scope for further negotiations has become more constrained. In turn, this implies the risk of a policy accident in the coming months remains high.
Afreximbank’s African Commodity Index declines moderately in Q3-2020
African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.
The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.
An overview of the AACI for Q3-2020 indicates that on a quarterly basis
- The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
- The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
- Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
- Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
- Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
- Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
- Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
- Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.
Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.
Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:
“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’
Beyond cost containment: Outsourced trading as the new norm
By Gary Paulin is Global Head of Integrated Trading Solutions at Northern Trust.
Outsourcing, initially of the back office, and subsequently of the middle office, has been a feature of the asset management industry for some years. More recently, in the third wave of outsourcing, managers began to outsource non-core front office functions, and the pace of change has grown rapidly to the extent that the industry has passed the tipping point of this transition.
For example, in our survey taken during Q1 2020 of 300 heads of investment operations from global asset management firms with assets ranging from $10 billion to $500 billion, 85% of respondents said they were already outsourcing their trading capability or were interested in doing so within the next two years.
What started as simply a cost-efficiency endeavour has evolved. The outsourced trading model has moved from being a largely defensive strategy – a response to cost pressures – to a proactive move that can de-risk and streamline operations and enhance governance and operational resiliency while also responding to very real and relentless margin progression.
In short, outsourced trading is increasingly viewed as a more optimal state for asset managers, and as the timing of the Northern Trust survey shows, this turn in thinking predates the onset of the Covid-19 pandemic. The pandemic in our view is an accelerant of change, but not the catalyst. We can see its origins more than a year ago, well before the economic cataclysm and office shutdowns of 2020.
Recent years have seen increased deal flow in the asset management industry, along with significant restructurings and increased investment in technology, as firms sought to gain scale, cut fixed costs and automate functions. These are classic responses to margin pressure, which has persisted even during the recent bull market in equities.
In fact, the drivers of change are global and go far beyond simple margin pressure. They include aspects of competition, the ability to leverage economies of scale, business resilience, changing economic models, variable costs, demographics, technology and regulation – drivers no longer hidden under the veil of strong markets. Critically, this past year has marked a significant change in the economics of the industry, as margins for many asset managers fell despite assets under management going up.
Margins are not expected to fall in a bull market like that of 2019 – when the S&P 500 gained over 28% – yet according to investment market analysts this, for many, is what happened. The long-held assumption that strong market returns correlate with asset manager financial performance broke down. Strong markets failed to mask the structural drivers underneath and, we believe, this was the tipping point for the industry.
As economics change so must operations. The pandemic brought new urgency – and opportunity – for managers to undertake an internal review of their whole office. The question at the bottom of such a review is whether a range of front office functions, historically perceived to be core to a successful asset management operation, actually deliver value. If not, these functions must be considered a cost and susceptible to outsourcing to a more cost-efficient platform. Meanwhile, the extended work from home protocols of 2020 have undermined some of the core objections to outsourcing, such as the assumption that portfolio managers need to work in close physical proximity to their trading desk.
Beyond the value/cost equation, however, there is increasing recognition that front office outsourcing – whether whole or in part – is directly beneficial. For example, outsourcing to a global service provider has enabled a range of firms to expand their investment horizons internationally without concern about governance issues as apply to passing overnight trading to third-party brokers who will almost certainly be under the same pandemic pressure as all the rest of us. Other firms have seized the opportunity of moving to a variable pay-as-you-go cost dealing structure to offer a broader slate of investment strategies or to develop their inhouse research capabilities.
These and other opportunities are new, and underline our view that front office outsourcing leads to an optimal state for investment managers; one where the playing field is levelled enabling medium and smaller firms to compete on the basis of pure alpha with large scale players.
But today, it is not just the smaller or medium managers who are outsourcing front office functions; many of the ‘big players’ are also in active transition. Why? Because the benefits of outsourcing apply to the whole asset management industry, but a hyper-scale manager requires a hyper-scale global service provider to work with. These used not to exist, now they do and both sides are riding the wave.
Factors That Affect the Direction of the Stock Market
A stock price represents the value of a particular stock of a particular entity, asset or another financial instrument. It is calculated by calculating the price per share of the stock at a particular price and period in time.
There are various factors that affect the direction of the stock market. These factors include interest rates and inflation rates as well as the state of the economy. If one of these factors is not in the favor of the stock market, then it could bring about a downfall of its value.
The stock prices are also affected by various stock indexes, which provide information on a particular company or industry. It helps to analyze the trends of the stock market and makes better decisions when buying and selling.
However, there are some major factors that can influence the performance of the stock market. One such factor is the state of the economy. The state of the economy refers to how well the economy is doing economically. If there is an economic decline in a particular country, then the state of the economy would be affected and the stock market would also take a hit.
Economic conditions can also affect the performance of the stock markets. For example, if the state of the economy is poor and the population is experiencing unemployment, then the economy will suffer and the stock prices will definitely take a hit.
Political turmoil can also bring about a negative effect on the stock markets because it affects the economic conditions and the way people relate to the government. When there is a lack of confidence in the state of the economy and people tend to sell off their stock at cheaper prices, the stocks of the company would suffer.
Another important factor that influences the direction of the stock market is the change in the global economy. It has been proven that the changes in the global economy are very large and it can affect the direction of the stock market in a major way. For example, during the global recession in 2020, the stock prices of many companies suffered a great deal and so did the profits of the company.
The most important thing that determines the direction of the stock market is the state of the economy and the state of the country in which the stock market is based. It is therefore, very important to invest in the stock market as a company that is in good condition. This is because it will help in ensuring the stability in the economy.
The price of the stock market is also affected by the political stability of the country in which the stock market is based. If there is a rise in the political instability, then the price of the stocks would surely go up. However, when the political stability improves, the prices of the stocks will definitely fall.
The factors that affect the direction of the stock market include the conditions in which the economy is doing. It is therefore, very important to have a good understanding of how the economic conditions in a certain country are progressing. This will help in making better investments.
There are certain countries that are very stable and these countries have a very high demand for the stocks of other countries. This means that people from those countries will invest in stocks of countries that are in good condition, and these investments will yield profits for them.
There are also certain countries that have very bad economic conditions and these countries have a very low demand for the stocks of other countries. These countries are also in need of investments and these investments will yield huge losses for them. Therefore, investing in these countries is not advised because these stocks will yield zero returns.
The stock markets are not stable unless there are good economic conditions prevailing in a country. This means that one has to know the economic condition of the country in order to make investments. Investing in the stock market is the best way to do this because investing will always yield returns, as long as the country in which one is investing is stable.
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