The headline-grabbing stories of the week have been the oil price collapse (after West Texas Intermediate briefly had a negative price); US states breaking ranks with the White House on relaxing lockdowns; and the EU’s bail-out package.
First, oil. It’s not difficult to grasp the problem: global demand is down 30%, the agreed production cut is 10% and not due to begin until 1st May 1 in any case, while storage facilities are full to the brim. Paying people to cart away surplus oil is a) unusual and b) not generally a sustainable business strategy. Despite legitimised collusion, oil production is still fiercely competitive: market share brings commercial, economic and geopolitical clout. The extent to which the major oil producing nations restore order to their houses and stabilise the price will be determined by a mixture of political obduracy, pain thresholds, nerve, pragmatism and brinkmanship. The producers don’t control demand; they do control supply.
Second, the US where Donald Trump appears to be losing both the narrative and control. Despite the likelihood of being short of the virus’ peak impact, as the economy collapses and 22m Americans have lost their jobs in less than a month, the prospect of increasingly widespread protest morphing into public disorder as people demand the right to return to their livelihoods has caused a number of states simply to ignore Trump, the scientists and medical experts, and begin to ease lockdown restrictions unilaterally. Politically, it’s a toxic brew which would be surprising were it not to play heavily in the Presidential election on November 3rd. Bearing in mind the fallibility of pollsters and a very fluid situation, at the time of writing every US poll in the last fortnight has Biden leading Trump.
Third, the EU’s €550bn coronavirus bail-out fund is being hailed as “huge”. Sadly, despite being €550 with nine further zeroes on the end, it’s likely to be woefully short; some (including the ECB) reckon the final sum required to restore stability to bust-up economies will be nearer €1.5tn (trillion!). It’s doubtful we’ve heard the last of this despite the rows it took to reach even this level of agreement. Incidentally, while the US economy is around 15% bigger than the aggregate GDP of the EU27, the $450bn extra funding agreed by US Congress this week to add to the $2.5tn US federal life-boat launched three weeks ago puts the EU’s “huge” sum in perspective.
But away from the headlines, we are turning our minds to a subject which, if not an immediate problem, has the potential to be of great significance longer-term: China and its relationship with the West. In the Covid-19 blame-game, China is the convenient scapegoat, not helping itself by admitting what many suspected, that it may have under-reported the Wuhan/Hubei fatalities by 50%. Trump’s strategic hostility towards China is well known but until a month ago, he was a lone voice among western leaders. Now he’s been joined by President Macron and our own Foreign Secretary saying there can be “no returning to business as normal” in the pandemic’s aftermath.
Is this a developing and enduring coalition of anti-China sentiment? Or is China merely a short-term lightning rod to deflect attention from domestic troubles? Under international law, is China liable to pay reparations? Are the West’s interests too embedded in and reliant upon China’s fortunes that jumping off its coat-tails as it forges ahead with its New Silk Road development and world-leading 5G expertise will be a futile, self-defeating gesture?
Covid-19 has already highlighted the extent to which the sustainability of many Western businesses is vulnerable to dislocation in supply chains from China (and wider Asia) and many will reappraise their business security to mitigate against future risks, but could the political backlash presage a wholesale withdrawal of investment from China? If so, how does China respond, as surely it will (President Xi is already harnessing nationalistic fervour in response, according to insiders)? Would it be able to re-focus its economy on domestic consumption and away from an over-reliance on exports? Would the authorities need to pump in monetary and fiscal stimulus despite its already high levels of debt? Would the economy still be able to meet the expectations of the Chinese public who have benefited from China’s growth in rising wages and ownership of assets and who have every expectation of continuing to do so?
What are the political consequences for Xi? He might be an autocrat but he’s not invulnerable. Strategically, would China continue to try and disintermediate the US dollar? China is the world’s biggest owner of US government bonds outside the US Federal Reserve: how would it use that leverage? What would be the consequences for global economic growth, China being the world’s second largest economy and having been responsible on its own for 30% of global economic growth in the past 3 years? What are the consequences for bonds, equities, commodities and currencies?
These are all open questions to which there are no immediate answers. From an investment standpoint it’s important to be thinking about them because Covid-19 crystallises the many debates about China, beyond Trump and his tariff wars, which have been simmering beneath the surface for some time.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions. The conditions have indeed been challenging these past few weeks; pleasingly, the Jupiter Merlin Portfolios have held up well in the circumstances.
Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
Fund specific risks: The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth
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