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The manufacturing conundrum

04 October 2019

4 minute read

By Gerald Moser, London UK, Chief Market Strategist

As sustained trade tensions hit leading economies around the world, and some are close to recession, what is the best investment strategy in such conditions?

With persistent trade tensions and rising geopolitical risk, the outlook for the global economy could be better.

The latest manufacturing data have been disappointing, especially in Germany. The German economy is likely to experience a technical recession, or two consecutive quarters of contraction, this year.

Were we to witness a German recession, it would likely be very small and primarily reflect the higher weight exports represent in the economy compared with other developed countries.

Indeed, other areas of the economy, such as the consumer or construction, are actually holding up well, suggesting that the European Central Bank’s more dovish monetary policy is feeding through to the economy.

Trade contraction hits manufacturing

The collapse in manufacturing stems from the difficult trade environment. The latest data suggest that global trade contracted in the first seven months of the year, a development usually associated with a global recession.

However, the ongoing tension on the trade front is depressing exports more than usual. Away from the well-publicised US-China trade friction, there are other key export markets suffering trade strain, such as Japan and South Korea.

Export growth impeded by global trade tensions

Uncertainty

The ongoing Brexit process in Europe also creates unwarranted uncertainty. That uncertainty, resulting from geopolitical risks, hinders capital expenditure. Companies are postponing any expansion plans as the uncertain outlook in regards to tax and the supply chain prevents long-term planning.

While it is likely that we will see pockets of fiscal stimulus in 2020, we think that the global economy could avoid a recession in the next 12 months, even without stimulus, assuming trade tensions do not escalate.

Looking for less uncertainty

From an investment perspective, this means we prefer companies that offer stable cash flows and more predictable earnings. Those are often found in areas immune to the trade tensions and with exposure to thriving consumers.

While investment is lacklustre, there are pockets of strength around technology investment. This is one area where most companies cannot afford to stay idle and this is reflected in the demand for strong technological products, such as the cloud and software. Companies exposed to that trend typically also display stable cash flows.

In fixed income, our preference remains emerging market (EM) sovereign debt. While growth remains more robust in EM compared to the advanced economies, the dovish tilt of the US Federal Reserve or the European Central Bank allows EM central banks to ease monetary conditions as well. This creates a positive effect as returns are coming both from attractive yields as well as rising prices.

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Market Perspectives October 2019

Barclays Private Bank investment experts highlight our key investment themes. They show how security selection and a bias to quality companies can provide the yield and outperformance needed at a time when it may be tougher to produce positive returns.

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