Investors should not rule out the potential for the US’ tariffs on the rest of the world to prompt a slowdown in global growth, the Jupiter Merlin team has warned. 
Recent months have seen markets focus on US president Donald Trump’s escalating rhetoric about the country’s trade deficit and how he intends to address it, sparking concerns that the world could be moving towards a trade war.
While Canada and the EU are among those threatened with tariffs by the Trump administration, much attention has been given the relationship between the US and China.
On 6 July, the Trump administration placed tariffs on $34bn worth of Chinese goods, leading China to hit back with retaliatory tariffs on the US; Trump has since threatened an additional $200bn (£150bn) worth of tariffs on China.
Asset allocator’s biggest tail risks
Source: BofA Merrill Lynch Global Fund Manager Survey
The most recent BofA Merrill Lynch Global Fund Manager Survey found that the heightened risk of global trade war was the biggest tail risk for asset allocators in July, with 60 per cent of the closely-watched poll’s respondents citing this concern.
In its latest update, the respected Jupiter Merlin multi-manager team pointed that out that this has been the cause of weakness in stock markets over recent months and argued that it should not be ignored.
The team – which comprises John Chatfeild-Roberts, Algy Smith-Maxwell, Amanda Sillars and David Lewis – noted that the global economy “has been in good shape with regards to growth, especially this late in the economic cycle”.
Global GDP growth reached 3.4 per cent in 2017 and economists are forecasting a similar result for 2018. For its part, the International Monetary Fund is even more bullish, expecting global growth to hit 3.9 per cent in 2018 and 2019 – although it does warn that the expansion is becoming less even and risks to the outlook are mounting.
The Jupiter Merlin team agrees with this viewpoint, saying: “There are risks: the world remains mired in debt and, led by the US Federal Reserve, principal western central banks have been gradually tightening policy since the autumn of 2016, whether by raising interest rates or reining-in bond purchase programmes (known as ‘quantitative tightening’).
“If they go too fast, they run the risk of stifling growth; if they go too slow, they risk leaving interest rates so low that in the event the economy slows or even reverses, they have very little flexibility to help stimulate growth again in more difficult times.”
It added that another risk stems from the trade tariffs announced by Trump. Although the US and EU surprised markets last week by saying they had reached an understanding on working towards an environment of zero tariffs, barriers or subsidies, Trump still appears committed to using tariffs as a negotiating tool with other countries.
“We have all become accustomed to the rather trite, vacuous electioneering slogans delivered by political leaders when out on the stump. When repeated ad nauseam such tag-lines become like verbal wallpaper. Think Theresa May’s ‘Delivering strong and stable leadership’ or Jeremy Corbyn’s ‘For the many, not the few’,” the multi-managers said.
“Donald Trump’s ‘We’re going to make America great again! Put America First!’ was another of those slogans which it was easy to dismiss as having as much substance as candy floss: big, fluffy, saccharine, superficially appealing but instantly melts to nothing in your mouth. Big mistake. Those 10 words are pure conviction ideology for Trump.”
The fund managers noted that ‘America First’ has been a common theme in every element of the Trump administration’s foreign and economic policies, being behind moves such as reforming the North American Free Trade Agreement, pulling the US out of the Paris Climate Accord, tax reform designed to encourage US companies to invest in the domestic economy and repatriate overseas cash balances, the proposed Mexican Wall, and many other initiatives.
“Underpinning each one is Trump’s conviction of what he believes is in America’s national interest. If that happens to chime with the interests of others, swell; if not, he really doesn’t care,” the Jupiter Merlin team said.
“Trump’s tariffs pose a new threat. It has been fashionable to assume/hope that, having sparked a trade war and international counterparties having responded, deals would be struck and compromises reached. But it would be lazy to adopt that as the default position. It is evident that national governments and companies are already starting to make plans to mitigate against the potential risks.
“Nevertheless, if protectionism becomes embedded, the economic debate shifts to whether there are clear winners and losers, whether some win and others lose but globally little changes (the ‘nil-sum’ game argument) or, worst of all, the significant increase in frictional costs causes global trade volumes to decline and everybody loses. Faced with such uncertainty investors have also been reacting, hence the relative weakness in many stock markets these past few weeks.”
For their own part, the managers said the Jupiter Merlin Portfolios are “appropriately structured” to deal with the challenges thrown up by this.
While conceding that they are not immune to any volatility, they said that investing in funds run by experienced managers with the 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 should prove sensible.
The team runs the Jupiter Merlin Balanced Portfolio, Jupiter Merlin Conservative Portfolio, Jupiter Merlin Growth Portfolio, Jupiter Merlin Income Portfolio, Jupiter Merlin Real Return and Jupiter Merlin Worldwide Portfolio funds.
The largest fund in the range is the £2.7bn Jupiter Merlin Income Portfolio, which is top quartile in the IA Mixed Investment 20-60% Shares sector over the past decade after making a 93.91 per cent total return.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund slips into the third quartile over five years, but is second-quartile over three years and back in the top quartile for the past 12 months.
Holdings in the portfolio include Evenlode Income, Royal London UK Equity Income, M&G Global Dividend, TwentyFour Dynamic Bond and Mayfair Capital Commercial Property Trust.
Jupiter Merlin Income Portfolio has an ongoing charges figure of 1.47 per cent and is yielding 2.90 per cent.