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Charts of the month: trade tariffs, Facebook and central banks

US and China dominate EU trade
Global trade was a top concer..

US and China dominate EU trade

Global trade was a top concern for markets in March amid fears US tariffs on Chinese goods could spark a full-blown trade war. The chart below shows that in 2017 a third of EU trade in goods was with the US (16.9%) and China (15.3%). It was a very different story back in 2000, when the US accounted for nearly 25% and China for just 5.5%. Machinery and transport equipment, other manufactured goods, and chemicals were the main categories of product traded by the EU. Total EU exports of goods in 2017 were worth €5.23 trillion although 64% of this was intra-EU trade, i.e. goods destined for another EU member state.

Read more:How and why rising trade tensions have moved markets

The UKs role is an interesting one, given that the UK is leaving the EU next year. The UK was one of only two EU members (the other being Cyprus) to export more goods to countries outside the EU than inside. 48% of UK exports went to other EU countries in 2017. The US was the UKs biggest single partner in terms of exports, followed by Germany and France. Meanwhile, Germany was the main country of origin for goods imports into the UK, followed by the US and China.

Emma Stevenson

Source: Eurostat, 26 March 2018

Trump tariffs and the trade deficit with China

President Trump has made reducing the trade imbalance with China a priority, having attributed unfair trade practices as a major factor in the loss of US manufacturing jobs. The implementation of tariffs is viewed as a tool to address this deficit, which was $375 billion in 2017.

Read more:US tariffs – more about political gains

As the chart below illustrates, this is significant relative to the size of bilateral trade deficits with other trading partners – although economists would point out that a countrys trade balance is impacted by a range of factors and a deficit in itself is not necessarily good or bad.

The trade balance is the section of a countrys current account which measures income from exports, and the costs of imports, of goods and services; the US imports more goods and services from China than it exports to China, resulting in a deficit. With mid-term elections scheduled for November, there is an incentive for the president to deliver on campaign pledges.

Andrew Rymer

Facebook faces the music

Facebook shares have declined by over -16.5% since the start of February, taking its return to -15.5% year-to-date (3 April). This from a company that returned +57% last year compared to the +20% return of the MSCI World index.

So what has happened? In short, the market is waking up to the systemic importance of what used to be a novelty company.

In the middle of 2017, Facebook reported it had reached the 2 billion user landmark. Chief Product Officer Chris Cox said in response: “Were getting to a size where its worth really taking a careful look at all the things that we can do to make social media the most positive force for good possible.”

Read more:How sustainable is "Big Tech" after the backlash

Since the start of 2018, governments across the world have realised they cant leave a company with the size and influence of Facebook to regulate itself. This will have material cost implications for Facebook and other internet giants.

According to Simon Webber, Portfolio Manager on the Global and International Equities team, this neednt be a bad thing. “We expect that regulation is going to catch up with Facebook, and as such, it must invest in its compliance systems and corporate responsibility. We are supportive of this increased investment to sustain longer-term growth. For now, Facebook retains its great barriers to entry, does not look expensive and is still growing earnings at 30% per annum.”

Andrew Lacey

Falling Facebook

Source: Schroders and Bloomberg, 27 March 2018

Why central banks are becoming more hawkish

Looking that the chart below, its easy to see why central banks are moving towards less accommodative monetary policy. The fall in unemployment in major economies since 2010 is striking. With tight job markets comes upward pressure on wages and increased inflation expectations, which central banks are keen to tame.

Read more: UK interest rate and US interest rate outlooks

Schroders economists forecast another three rate rises in the US in 2018, following the increase in March. They also expect the Bank of England to hike rates this year and the European Central Bank to bring quantitative easing to an end in September.

Philip Haddon

Fear and loathing in UK

For those trying to quantify the extent of pessimism towards the UK equity market the Bank of America Merrill Lynchs latest monthly fund manager report has been well referenced of late. This chart is taken from page two of the banks March survey of global fund managers and illustrates what it describes as the “big short” towards UK equities. For those who read on, the extent of the negativity is underlined by news that 42% of respondents reported being underweight in UK equities last month.

Read more:Unloved UK-focused stocks cheapest in a decade

This is a record “high” for the survey, surpassing the level of underweight positions seen in the wake of the global financial crisis. This state of affairs is also pretty entrenched; it is the fourth year in which global fund managers have been underweight the UK.

Simon Keane

Mind the gap: US v Spain

As highlighted in the previous Charts of the Month, it seems the so-called peripheral European countries – Spain, Italy, Portugal and Greece – are undergoing a reversal of fortunes. Certainly if government bond markets are anything to go by.

While government yields in these countries are in decline, reducing the cost of debt financing, the chart below, Spains 30-year yield compared to the US, is particularly stark. The rising US yield reflects higher growth and inflation expectations following tax reform being passed in December, but the inverse move in Spains yield has been pronounced.

In January, Spain received its first investment grade rating since the financial crisis: an A from Fitch. With yields falling the Spanish treasury has sought to press home its advantage with a series of debt issues and is making material inroads into a substantial 2018 total capital raising target.

In February, it launched its first 30-year bond issue in two years, raising €6 billion at a yield of 2.726%, bringing the year-to-date total to €29 billion. Orders for the 30-year issue exceeded €25 billion, far above any previous single 30-year issue from Spain.

Partly, this reflects the global search for yield. German investors took up 20% of the 30-year issue, following a change in regulation, given the attractive pick-up in yield (carry) on offer relative to their domestic market.

Spain will hope the current positive mood continues with the treasury projecting a need for a further €126 billion to be raised via medium to long-term instruments in 2018.

James Molony

Important Information: The views and opinions contained herein are of those named in the article and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This communication is marketing material.

This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

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