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Discussions of climate action failure, economic downturn in emerging markets, and an uncertain global trade environment took center stage at the 50th World Economic Forum (WEF) in Davos, Switzerland last week. Wedged into virtually every discussion was the US-China Phase One trade agreement, which experts hope will reverse global downtrends in trade volume.
Investors have a lot to take from Davos. The annual congregation of global leaders in business and politics hosts discussions that set the year’s economic agenda. How that agenda plays out is felt by investors whose portfolio performance reflects trade friction, monetary policy, financial market growth, and geopolitical risk.
Below, we’ve put together a brief primer on the event and summarized a handful of key takeaways relevant to investors and market-watchers, including:
- The China-US Phase One trade agreement
- Tariff rollbacks, trade purchases, and IP rights
- Potential US-EU auto tariffs
- Slower Chinese and Indian growth
- China’s debt-to-GDP problem
- The new consensus on environmental investing
In The Spotlight: The US Trade Agenda
Alicia Ibbara, UN Economic Commission for Latin America and the Carribean, remarked that “trade in general is dropping…exports went down 3% last year, imports 5%.” However, once the Phase One agreement enters into force on February 15, the downswing will likely begin a reversal as China projects to import over US$260 billion in total goods from the US in 2020 should the deal hold. This is a major improvement over the US$185 China was importing in 2017 before the onset of the trade war.
That year, Trump went on the offensive at Davos and rallied against free trade. His administration imposed protectionist trade barriers on imports from China, and steep tariffs on steel and aluminum from partners such as the EU and Canada—costing companies and consumers on all sides, and curtailing an estimated 300,000 jobs in the US alone.
Internationally, the global volume of goods and services stand to gain from the implementation of the Phase One agreement and its tariff rollbacks, trade purchases, and commitment to intellectual property (IP) rights. However, the Trump administration now has its sights set on the European Union, as US Treasury Secretary Steven Mnuchin threatened to impose auto tariffs on European vehicles unless an agreement is soon reached.
Forecasts Point to Cautious Growth in 2020
At Davos, experts called for stronger growth, with strong caveats to match. Political issues such as Brexit, the US-China trade war, and Middle Eastern instability loom over an otherwise optimistic year for markets. How markets perform in the coming year will largely depend on how these political risks are ameliorated in the months ahead.
Davos’s Wall Street wing is notoriously fickle, with opinions—for example, on President Trump’s trade agenda and tax policy—flopping from year to year. This time around, their outlook on the President is rosier than ever. Even WEF founder Klaus Schwab, who had previously kept quiet about his administration, applauded President Trump on opening day for “injecting optimism” into international markets.
Experts were more bearish on Chinese economic performance in the year ahead. Professor Zhu Ning, one of China’s leading academics, predicts lower growth (4-5%, down from 6%) and higher debt. Currently, China’s debt-to-GDP ratio sits at about 270%, roughly in the same range as the US prior to the global financial crisis. Similarly, the IMF predicts slower growth in India than originally forecasted in October, and cut its global growth projections from 3.4% to 3.3%.
Environmental Action At The Top of The Agenda
Every year, the WEF identifies the top five risks that threaten global market stability. In years past, these have included involuntary migration, asset price collapse, and cyberattacks. This year, all five were related to climate change and extreme weather events.
At this year’s WEF, BlackRock, which manages US$7.4 trillion in assets, announced that targeted investing is now a core goal of the company. The fund considers environmental stability to be central to its mission and is now developing an environmentally and socially-conscious version of its iShares ETF and retirement funds.
While Davos is far from a climate change conference, the subject now dominates plenary and roundtable discussions among the most powerful in attendance. Bank of England Governor Mark Carney announced that new accounting standards for climate-related risks will be rolled out by the end of the year. Saudi Aramco board member Andrew Liveris admitted that the company has a 10-year plan to transition away from oil. Guggenheim CIO Scott Minerd advocated for a national carbon tax.
Environmental action was treated at Davos as a bi-partisan responsibility. This year more than ever, asset managers are signaling a willingness to transition to low-carbon holdings and offer more options for targeted investments in environmentally sustainable portfolios.
Why You Should Care About Davos
The WEF brings together the most influential leaders in business, politics, academia, and civil society groups to help shape the global industrial agenda. Despite its critics, Davos is not merely a mouthpiece for the world’s powerbrokers and global elite. It’s a forum for real policy development.
For example, in 2015, Davos was the birthplace of the New Development Bank (NDB), an international organization to rival the IMF founded by the BRICS countries (Brazil, Russia, India, China, South Africa). Since then, the NDB has accumulated US$50 billion in initial subscribed capital for development projects worldwide and is poised to disrupt traditional monetary management systems like the World Bank.
Prepare Your Portfolio For The Year Ahead
Davos is rarely a forum for consensus-making. However, the 50th annual Davos meeting seems to have given rise to a surprisingly positive reception for President Trump’s monetary, fiscal, and trade policies. Whether this will be sustained through the year remains unseen.
What we know for certain is that Trump’s tit-for-tat tariff match with China’s Xi Jinping may resume any day. The preliminary Phase One trade agreement has not yet come into force, and any revocation by either side will cause trade barriers to snap back into place via a new bilateral resolution mechanism, which would send markets and consumer confidence in a tailspin.
There’s never been a better time to invest in gold bullion and gold-backed ETFs in a tax-advantaged Roth IRA to safeguard your investments. Or, invest for your retirement with confidence by adding gold and other precious metals to your 401(k) plan. Amid political uncertainty and fickle markets, taking a position in gold and silver can go a long way in protecting your wealth.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.