March 23, 2018

Why wealth distribution is key ?

Management comment

The trade war has entered a new more critical confrontation phase between the US and China. Customs tariffs could be applied to 1,300 Chinese products worth an estimated total of $60 billion. Chinese investments in the tech sectors could also be restricted.

Donald Trump has magnanimously granted the Europeans a reprieve until May to reach an agreement on steel and aluminium tariffs. Financial markets have been shaken by this carrot-and-stick approach which has triggered further volatility among the currency and fixed-income markets. As long as the confrontational rhetoric regarding trade continues, financial markets are highly likely to remain unstable. The Americans will nevertheless have to be careful to avoid over-exasperating their trade partners who are also their financial partners who buy heavily into US debt. The steepening interest-rate trend earmarked by Jerome Powell, involving three hikes in 2018 followed by three increases in 2019 and two more in 2020, should incite European investors to continue acquiring US debt however.

The battle for a fairer distribution of global wealth stemming from the ultra-globalisation in trade is also becoming perceptible even within companies. The question of distribution between capital and labour production factors has traditionally haunted economists, as this topic represents the keystone of the capitalist edifice.

Several major companies including Toyota, Skoda, Porsche, JP Morgan and Walmart have recently improved their compensation policy by granting wage increases or significant pay-outs. The increasing divergence in income among the middle classes compared to the average historic trend constitutes a major challenge for managers and governments. Without wage inflation, there will be neither price inflation nor healthy inflation. Labour shortages are already a reality in Europe, with unemployment falling by more than three points.

Companies will therefore have to find ways to protect their margins in a volatile environment. For the time being, it is still too early in the year to form an initial view on the strength of underlying earnings momentum. Consensus earnings forecasts will be even more of a determining factor than last year, as several headwinds are gathering pace in the form of less-accommodating monetary policy and trade war rhetoric. Neither of these factors is likely to reassure the financial markets.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in March 23rd, 2018.

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The trade war has entered a new more critical confrontation phase between the US and China. Customs tariffs could be applied to 1,300 Chinese products worth an estimated total of $60 billion. Chinese investments in the tech sectors could also be restricted. Donald Trump has magnanimously granted the Europeans a reprieve until May to reach an...
2018-03-23