A global trade war would hit financial markets hard, potentially wiping trillions of dollars off the value of stocks and other assets.
So it's a wonder investors appear relaxed at the prospect which, ominously, is growing more likely by the day.
There's a surprising correlation developing between the newsflow and markets: the more tariffs and counter-measures are threatened and applied, the higher major stock markets go, and the lower volatility goes.
This is despite the fact that, according to Bank of America Merrill Lynch's (BAML) latest fund manager poll, a global trade war is the biggest single tail risk facing investors since the euro debt crisis six years ago.
If the lessons of the past are heeded, however, like the 1930s when protectionism around the world was rampant, investors should be hunkering down and doing whatever they can to protect their portfolios. But they aren't.
Financial market volatility is low and inching lower, suggesting there's little demand from the investment or business community for protection from sizeable equity, bond or currency price swings via the options market.
Average volatility in US bonds and major FX rates in the second quarter was lower than Q2 last year. Average Wall Street vol was higher, thanks to the residual effects of February's record surge in the VIX "fear index", but is falling once again.
The results of BAML's latest fund manager survey are instructive. Some 60 per cent of those polled say a trade war is the biggest tail risk to markets right now. The last time there was a consensus that strong was in 2012.
Then, the euro zone was in existential crisis. Collapse was only averted by an unscripted, off-the-cuff remark from ECB President Mario Draghi in July that year that the central bank would do "whatever it takes" to save the single currency.
The euro crisis was the main market risk for 16 months in a row in 2011-12. A trade war has been the main risk for four months this year, and only this month did it really explode onto investors' horizons. It can get a lot worse before it gets better.
The deep complexities of world trade means "whatever it takes" and Mr Draghi equivalents are impossible. Yes, US President Donald Trump could backtrack on everything he's said on trade and "making America great again", but there's not much evidence of that happening soon.
Adam Slater at Oxford Economics draws attention to the 1930s, which contributed to world exports collapsing 30 per cent from 1929-1932. Long-term losses to global economic output weren't as heavy as feared because of economies' ability to adapt, but the spillover to financial and commodity markets was severe.
The world trade system fragmented and the damage lasted decades. Tariffs became entrenched and a feedback loop between financial markets and protection magnified the damage.
The current rise in protectionism is on a much smaller scale than the 1930s. On the other hand, the global economy is much more dependent on trade than it was then. Trade accounts for some 60 per cent of global GDP, three times more than the late 1920s.
"Once a trade dispute starts, escalation can be a lengthy process. Feedback effects connected to financial markets are potentially very significant," Mr Slater said.
In its nine-page update on the global economic outlook last week, the IMF referenced "trade" 26 times. If current trade policy and threats are followed through, global GDP growth could be 0.5 percentage points less than forecast by 2020, it warned. The United States is "especially vulnerable".
But this is why markets have, on the whole, shrugged off the current trade spat. The United States may have imposed tariffs on Chinese imports and Beijing may be letting its currency fall, but there's been no discernible hit to growth. Yet.
Even the IMF, despite its warning, stuck to its forecast from April and predicted global GDP growth of 3.9 per cent this year and next. Growth and corporate profits have, so far, not suffered.
Julia Coronado, president and founder of research firm MacroPolicy Perspectives and a former economist at the Fed, believes we'll get a better idea of the impact on businesses in the coming weeks as the Q2 earnings season unfolds.
"Each company will know how they will respond to rising trade tensions through changes in prices, margins and other strategic investment and production decisions," she wrote in a blog last week.
"I suspect the risks to the current rosy outlook are to the downside," Mr Coronado said, citing Reserve Bank of Australia governor Philip Lowe, who said last month: "Can any of us think of a country that's made itself wealthier and boosted productivity growth by building walls? Probably not."
Reuters
The specs
AT4 Ultimate, as tested
Engine: 6.2-litre V8
Power: 420hp
Torque: 623Nm
Transmission: 10-speed automatic
Price: From Dh330,800 (Elevation: Dh236,400; AT4: Dh286,800; Denali: Dh345,800)
On sale: Now
if you go
The flights
Etihad, Emirates and Singapore Airlines fly direct from the UAE to Singapore from Dh2,265 return including taxes. The flight takes about 7 hours.
The hotel
Rooms at the M Social Singapore cost from SG $179 (Dh488) per night including taxes.
The tour
Makan Makan Walking group tours costs from SG $90 (Dh245) per person for about three hours. Tailor-made tours can be arranged. For details go to www.woknstroll.com.sg
Ms Yang's top tips for parents new to the UAE
- Join parent networks
- Look beyond school fees
- Keep an open mind
In numbers: PKK’s money network in Europe
Germany: PKK collectors typically bring in $18 million in cash a year – amount has trebled since 2010
Revolutionary tax: Investigators say about $2 million a year raised from ‘tax collection’ around Marseille
Extortion: Gunman convicted in 2023 of demanding $10,000 from Kurdish businessman in Stockholm
Drug trade: PKK income claimed by Turkish anti-drugs force in 2024 to be as high as $500 million a year
Denmark: PKK one of two terrorist groups along with Iranian separatists ASMLA to raise “two-digit million amounts”
Contributions: Hundreds of euros expected from typical Kurdish families and thousands from business owners
TV channel: Kurdish Roj TV accounts frozen and went bankrupt after Denmark fined it more than $1 million over PKK links in 2013
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.”
From Zero
Artist: Linkin Park
Label: Warner Records
Number of tracks: 11
Rating: 4/5
UAE currency: the story behind the money in your pockets
The Bloomberg Billionaire Index in full
1 Jeff Bezos $140 billion
2 Bill Gates $98.3 billion
3 Bernard Arnault $83.1 billion
4 Warren Buffett $83 billion
5 Amancio Ortega $67.9 billion
6 Mark Zuckerberg $67.3 billion
7 Larry Page $56.8 billion
8 Larry Ellison $56.1 billion
9 Sergey Brin $55.2 billion
10 Carlos Slim $55.2 billion
The specs: Audi e-tron
Price, base: From Dh325,000 (estimate)
Engine: Twin electric motors and 95kWh battery pack
Transmission: Single-speed auto
Power: 408hp
Torque: 664Nm
Range: 400 kilometres
The specs: 2018 Genesis G70
Price, base / as tested: Dh155,000 / Dh205,000
Engine: 3.3-litre, turbocharged V6
Gearbox: Eight-speed automatic
Power: 370hp @ 6,000rpm
Torque: 510Nm @ 1,300rpm
Fuel economy, combined: 10.6L / 100km
Fire and Fury
By Michael Wolff,
Henry Holt
Ukraine
Capital: Kiev
Population: 44.13 million
Armed conflict in Donbass
Russia-backed fighters control territory
Martin Sabbagh profile
Job: CEO JCDecaux Middle East
In the role: Since January 2015
Lives: In the UAE
Background: M&A, investment banking
Studied: Corporate finance
TO%20CATCH%20A%20KILLER
%3Cp%3E%3Cstrong%3EDirector%3A%20%3C%2Fstrong%3EDamian%20Szifron%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3EStars%3A%3C%2Fstrong%3E%20Shailene%20Woodley%2C%20Ben%20Mendelsohn%2C%20Ralph%20Ineson%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3ERating%3A%3C%2Fstrong%3E%202%2F5%3C%2Fp%3E%0A
Volvo ES90 Specs
Engine: Electric single motor (96kW), twin motor (106kW) and twin motor performance (106kW)
Power: 333hp, 449hp, 680hp
Torque: 480Nm, 670Nm, 870Nm
On sale: Later in 2025 or early 2026, depending on region
Price: Exact regional pricing TBA
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"
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
The specs: 2018 Volkswagen Teramont
Price, base / as tested Dh137,000 / Dh189,950
Engine 3.6-litre V6
Gearbox Eight-speed automatic
Power 280hp @ 6,200rpm
Torque 360Nm @ 2,750rpm
Fuel economy, combined 11.7L / 100km
The specs
Engine: Four electric motors, one at each wheel
Power: 579hp
Torque: 859Nm
Transmission: Single-speed automatic
Price: From Dh825,900
On sale: Now
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
COMPANY PROFILE
Name: Qyubic
Started: October 2023
Founder: Namrata Raina
Based: Dubai
Sector: E-commerce
Current number of staff: 10
Investment stage: Pre-seed
Initial investment: Undisclosed
A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
Killing of Qassem Suleimani
Specs
Engine: Dual-motor all-wheel-drive electric
Range: Up to 610km
Power: 905hp
Torque: 985Nm
Price: From Dh439,000
Available: Now
