The economics of geopolitics
Trade war escalation and stalled Brexit negotiations have boosted investment risk and market volatility. Our panelists discussed the geopolitical landscape and how it's influencing investment decisions.
The expected conclusion to Brexit is weighing on eurozone economic growth. The inability of the U.K. Parliament to find an equitable agreement to leave the European Union (EU) triggered the resignation of Prime Minister Theresa May. We expect Boris Johnson to be the Conservative Party’s choice to replace May.
Johnson favors a renegotiation of the original deal, but supports a “hard” Brexit — where the U.K. leaves the EU without an agreement to clarify trade and other issues — if that’s not possible. With the EU holding firm that it will not renegotiate the exit deal, Johnson’s ascension to prime minister would increase the odds that the U.K. could leave the EU on Oct. 31 without a deal.
Source: Ivy Investments analysis of CPB World Trade Monitor and Eurostat economic data. June 2019.
In our view, the U.K. will fall into recession if this occurs. We hope that Parliament would step in before this occurred, which could include a vote of no confidence that could result in new general elections and a new government. While a hard Brexit is not our base case, the risks of such an event have clearly risen.
The outlook for the other side of the Brexit equation is somewhat tame. The eurozone’s economy is tied to not only China, but also the global trade cycle. The European Central Bank (ECB) continues to push out its own forecast for when it will be able to raise interest rates, with its deposit rate currently at -0.4%. Recently, the ECB indicated it stands ready to ease if needed. We increasingly believe that the ECB will have difficulty getting the deposit rate much above zero before the next recession and could still have negative rates at that time.
Past performance is not a guarantee of future results. Risk factors: Investment return and principal value will fluctuate, and it is possible to lose money by investing. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the net asset value of a fixed income security may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. These and other risks are more fully described in a Fund’s prospectus.
The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. It is not possible to invest
The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through July 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.