Thursday, June 20th, 2019
In 2019 there are clear signs that global economic growth is moderating. Germany is leading weakness in Europe as industrial production and factory orders show declining activity, along with survey data that indicates a continued slowdown. The US economy is still growing and generating jobs, but growth has moderated from over 4% six months ago to just over 2% today. The Fed’s base case is for continued but slower economic growth, driven by productivity improvements and population growth which for the US and UK would be around 1.5%. The Federal Reserve has recently bowed to market pressure and put the rate hiking cycle on pause, a move which has sparked a sharp relief rally in risk assets
With this as a backdrop, we turn our attention to the current trade war and US-led bans on Huawei products. In late 2017 the US started to look closer at its trade deficit with China and started to institute legislation to start to curb this imbalance and reduce the US imports of Chinese goods. This resetting of the economic relationship has lead to bilateral talks which as yet have not borne fruit. At the heart of these disputes is the fact that there is a battle on for GDP growth in a world that does not have synchronised global growth. The US feels the Chinese have been “stealing” economic growth from it and they are now addressing this. Some of their complaints are valid and others are just posturing by Trump to his electorate.
What does this mean for investments? Markets are dynamic and talks are on-going so it’s impossible to know for sure. What we do know is that the threat of a breakdown to this relationship is real and should be taken seriously. The US and China together account for approximately 40% of global GDP, so the result of an all-out spat between the two would have far felt repercussions to the globe.
Huawei under Fire
Huawei has been an example of the type of disruption that can ensue if these two economic giants tussle:
Huawei is a symbol of Chinese success. The ban on Huawei will have the result of encouraging the Chinese company to establish its own supply chain for all its goods and services. It would mean that they would require non-US companies to supply them their hardware needed like microchips etc. This is terrible news for US chip makers like QUALCOMM.
Huawei is restricted from doing business with any company in the US, therefore, they can’t use Googles’ Android products via its app store and Google has terminated this software agreement.
Technically this could lead to more sales for the iPhone and other devices but this would still need to be proved in practice. Google should not be drastically affected. Their suite of services and products are in such demand that anyone that can’t get their products will switch to another device. If you can’t get your Gmail you will probably buy a device which can. The investment community will no doubt watch what the retaliation affects will be.
We believe our philosophy of buying quality companies that are not dependant on one customer and have large network effects, is your ultimate defence against this sort of disruption.