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Rathbones: Market wheels still wobbly despite ‘all-time highs’

US, China and a trade deal: could there be a case of disappointment?

Joy and rapture abounded in the first quarter as three specific concerns were smote: the US Federal Reserve put the brakes on interest rate hikes, Chinese growth appeared to rebound and US president Donald Trump sent promising tweets about a China trade deal.

All of these things are now so close to resolution that you can almost taste it. It has certainly got investors excited; they bought the S&P 500 so aggressively that it made one of the quickest recoveries from a 20 per cent fall ever. Markets are now back at all-time highs. But these concerns which have been looming large over markets are still unresolved. The wheels may yet fall off one or all of them.

Many economists and talking heads have been filling the airwaves with yarns about the health of the global economy and how the US could be about to roll over into recession, while China is stumbling through a minefield of corporate and public debt. We are less perturbed about the fundamentals of worldwide commerce. Some data is a bit patchy, but most is reasonably good.

Taken as a whole, it does not scream recession to us. However, we are wary that investors may have got ahead of themselves in the short term. Many have jumped back on the equity bus because they think all the major roadblocks of the past year or so have been cleared. What happens if they find that one or two actually remain? Take the Fed. It has been at pains to assure investors that it has shelved plans for tightening monetary policy at the relatively rapid clip of 2017/18.

So much so that investors had begun hoping for a rate cut this year. Certainly, Trump would be keen. But despite lacklustre inflation, economic data in the US has remained steady and we suspect the Fed will be more concerned about keeping bullets in the chamber for the next downturn.

At its May meeting, the Federal Open Market Committee confirmed it will remain patient and watch the data and, with the US economy in a good place, it could well be that the Fed steps back into rate-hike mode in due course.

Or take Chinese growth, which may soon decline faster than some people are comfortable with. We think the country is unlikely to slump into recession any time soon, but its leaders are starting to prioritise structural reform over simply pumping more government money into the economy to prop up businesses when expansion slows.

This would be a big divergence from China’s 21st century playbook. How would investors react to such a hands-off response?

Would they panic – like every other time Chinese growth dips – especially if next time, uncle Xi isn’t tossing buckets of money around?

Then there’s the loosest leg of them all: a trade deal. How many times have we been a couple of weeks and a grinning backslap or two away from an agreement between the US and China? How many reports of US trade envoy Robert Lighthizer boarding a flight to “seal the deal”?

How many enthusiastic, tantalising tweets have turned out to be hubris or downright false?

This time could be the clincher, but we have to be realistic. There’s a good chance that it will melt away to nothing once more. Equally, if a deal does get done, where might Trump turn his attentions next?

We don’t mean to sound miserable – we’re really not. We’ve been happy with global growth and equity markets throughout the past few years. But over that time, we’ve been highly sceptical of the herd stampeding around markets. And this stampede has had a remarkable change of direction since the start of the year. We’re not expecting a collapse or rout; we just think there’s a good chance of disappointment and a snapback, so we’ve been taking profits and will be happy to buy the moment the stampede loses its nerve.

Will McIntosh-Whyte is assistant fund manager for the Rathbone multi-asset portfolios

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