The past week has provided yet further proof as to why investors should consider geopolitical factors in their investment strategy.
That utter shambles that is the British Brexit negotiation claimed its ultimate casualty last week with the resignation of Prime Minister May, effective June 7th. I won’t dwell on her inept handling of the negotiations, but suggest that the potential consequences of her failure are very troubling.
May’s departure creates a vacuum in the leadership of the Conservative Party….a vacuum that may be filled by one of a host of unappealing candidates, the duplicitous Boris Johnson among them, that make a “hard” no-deal Brexit more likely. The political turmoil in Britain has allowed Nigel Farage to start a new Eurosceptic party that has already garnered a fair amount of support. The presence of Mr. Farage’s party will certainly complicate the next British general election. As well, the currently dismal polling results for the Conservative Party make the election of Labour’s Jeremy Corbyn more likely. Mr. Corbyn is extremely left wing and would likely not be a positive for the British economy or markets. It remains to be seen if a second referendum will be allowed (which appears likely to produce a “Remain” result) or if the terms of a deal can be agreed upon in Parliament. However, the probability is not encouraging.
Brexit will continue to exert economic and political influences on Britain and related parties. The swift decline in the pound last week is evidence of that. We have long been of the view in the Global Investment Letter that caution should be exercised with pound denominated assets. We also continue to believe that a low risk trading opportunity, of which subscribers will be informed, will eventually be produced by the volatility surrounding Brexit.
The past week also revealed that the positive rhetoric surrounding the trade talks between China and the United States was but an exercise is wishful thinking. We had cautioned for some time that the risks of a negative outcome were much higher than many believed. We maintain that trade is just one of a host of issues at play as the United States and China grapple for global influence. We will likely see the development of a bi-polar world as the century wears on, particularly in economic and technological terms, with major consequences for investors. American reservations about Chinese technology seem set to accelerate this outcome. The contest between China and the United States will be a boon for some companies and industries and produce significant threats for others.
The American/Chinese trade war is not the only threat to global growth. The prospect of the Trump administration threatening to impose protectionist trade measures on the European Union and Japan remains.
Brexit and the Chinese/U.S. trade war are but two geopolitical issues that could impact investors in the years to come. The front pages may prove more valuable for investors than the business pages in the next decade.
On behalf of your editor and the rest of the Global Investment Letter team,
Editor & Publisher