US trade tensions with China are likely to deteriorate this year and hamper global economic growth in 2019, according to a report by Moody’s.
The rating agency said on Thursday it anticipates the implementation of further tariffs on US imports from China, in addition to the initial 25 per cent tariffs on $50 billion worth of imports, and the steel and aluminium tariffs already in effect.
“We expect to see more restrictions on Chinese acquisitions of firms in the US and Europe, and our base case scenario now assumes that the US administration will go forward with some of the proposed restrictions on imports from China,” Elena Duggar, chair of Moody’s Macroeconomic Board said in a foreword to its quarterly global outlook.
Talks between US and Chinese officials aimed at resolving the escalating trade dispute ended on Thursday with no major breakthrough, according to media reports. Instead, both countries activated another round of tariffs on $16 billion worth of each other’s goods.
Likely retaliatory measures by the Chinese government are expected to shave off up to 0.3-0.5 percentage points from China’s real GDP growth in 2019, according to the Moody’s report.
Economists say a prolonged trade war would stifle business activity in both the US and China, and dent global economic growth.
However, Moody’s said that moderate fiscal policy and liquidity easing measures planned in China could offset most the effects. For the US, the underlying economic momentum remains “very strong”. Trade restrictions are expected trim off around one quarter of a percentage point from real GDP growth to 2.3 per cent in 2019.
Most of the impact of trade restrictions on economic growth will be felt in 2019, said Madhavi Bokil, Moody’s vice-president and lead author of the report.
“The magnitude of the macro impacts will depend on market sentiment,” he wrote. “Tightening of financial conditions through asset price and currency adjustment and a broader hit to business and consumer confidence are now more likely than a few months ago and have the potential to derail the global economy.”
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The near-term growth prospects for most of (the advanced) G-20 economies remain solid – they are projected to grow at 3.3 per cent in 2018 and 3.1 per cent in 2019, according to the report. The G-20 emerging markets will be the main drivers of global growth this year and next, with average GDP growth forecast at 5.1 per cent.
However, many major emerging market countries – including Turkey, Argentina and Brazil – have suffered a decline in economic activity due to higher oil prices, mounting trade tensions and tightening of financial conditions.
“Escalating trade frictions further add to overall uncertainty,” Moody’s said. “Those with weak fundamentals and relatively shallow, but open, capital markets are particularly vulnerable.”
Financial market volatility and reversals of capital flows away from emerging markets are expected if global financing conditions tighten, the report added.
The International Monetary Fund in July also warned that global economic growth could slow in the medium term as a result of the US-China trade row.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
WORLD CUP SEMI-FINALS
England v New Zealand (Saturday, 12pm)
Wales v South Africa (Sunday, 1pm)
Election pledges on migration
CDU: "Now is the time to control the German borders and enforce strict border rejections"
SPD: "Border closures and blanket rejections at internal borders contradict the spirit of a common area of freedom"
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