Donald is no Achilles

By Didier Saint-Georges, managing director and member of the investment committee of Carmignac

The stock markets are clearly uneasy about the way the situation is taking place. In particular, they worry that the protectionist crusade of Donald Trump will cause an economic crisis in China or, at least, a drastic slowdown.

The Chinese stock market has already lost 15% of its value since the beginning of the year, as well as the Argentine market, which has a much weaker economic framework. The fixed income and currencies of the emerging countries (including the Asian giant's currency) have also been very distrustful of international investors for a month. Are investors right to see Donald Trump as a modern Achilles, whose anger makes him face the enemy violently and not stop until he destroys it? Not to offend, but we doubt that the US president has the profile of a Homeric hero.

It is true that Donald Trump is now surrounded by advisers (especially Peter Navarro in trade policy and John Bolton in national security) who are the architects of the hypothesis about the strategic and even existential threat posed by China to the US. While the current hostilities at the trade level only represent the dawn of a major attack against the Made in China 2025 plan – the cornerstone on which Xi Jinping has built his medium-term vision for the country – the battle has only begun.

The Chinese president will not give up his goal of pushing his country to the top of the industrial value chain, and the technology sector in particular. However, it would be a bit contradictory to admit that Trump, true to the opportunistic style of a businessman in the real estate world, will apply his political and economic program in a pragmatic way and, at the same time, believe that he will behave like a true ideologue.

His political survival depends on the November 6 midterm elections, in which his Republican Party will try to retain a majority in Congress that it could very well lose. Donald Trump has understood perfectly that the battle of the trade balance is a political issue that suits him, just like immigration suits Matteo Salvini in Italy.

However, he is also aware that great collective causes end where individual interests begin: when a sufficiently large number of US companies make public their situation as collateral victims of his protectionist campaign, Trump will know that the time has come to deploy his negotiation skills with trade partners in order to come out of the midterm vote with the Republicans still controlling Congress.

It would be easy enough for China to offer an agreement that Trump could present as a clear victory while maintaining its long-term objectives. However, it is not certain that this will happen immediately, given that the elections will be held in four months. Therefore, we can foresee that the nervousness of the markets will continue during the next few weeks until a new handshake – no doubt a masculine one – finally seals an agreement (or several).

For investors, the real risk of the protectionist fuss is more damaging than it may seem. In the short term, the panic is undoubtedly excessive and driven exclusively by a rebound of volatility in the markets, caused by the grandstanding of public negotiations, especially at the hands of a puppeteer with a desire for prominence.

The effect of this uncertainty on consumer confidence, and on the global supply chains of corporations, heralds a much more serious threat in the months to come: being the catalyst to the downturn of an economic cycle that is already showing signs of exhaustion and weakness, at a time when central banks will be short of ammunition and the room for budgetary maneuver will remain very limited, both in the US and Europe.

All opinions included in this article belong exclusively to the author and may not reflect the views of BNY Mellon. The information presented does not constitute treasury services advice or commercial or legal advice, and should not be considered as such.

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