The Italian job

All of a sudden, politics matters again. The benign electoral outcomes in 2017 in France, Holland and Germany had lulled investors into complacency. Italy’s general election in March 2018 was a wake-up call. The two parties with the biggest share of the vote - the Five Star Movement and Lega (League) - are anti-EU low-taxers and high-spenders. That’s a combination guaranteed to spook investors - especially as President Mattarella intervened to block the appointment of a new finance minister and threatened a second election with Italy’s EU future as the primary focus. That risk seems to have been averted for now, but the chart shows the difference in the cost of borrowing for the Italian and German governments. Investors are naturally demanding a lot more to compensate them for the risk of lending to Rome.

Source: Thomson Reuters Datastream, as at 5.6.18

Oil on troubled waters

Pouring oil on troubled waters is supposed to calm them. Adding the highest price of crude for four years to an already choppy market and economic situation has been anything but soothing. It’s been a perfect storm for the oil price. Saudi Arabia, its OPEC partners and Russia have been super-disciplined about cutting production over the past 18 months. Venezuela’s production has collapsed along with the rest of its troubled economy. US Shale is able to pump more oil but the pipelines and storage facilities are full. And now President Trump has Iran in his sights. The question now is at what point the higher oil price starts to crimp consumption. Big oil users like the airlines and commodity producers are starting to squeal. On the forecourts, higher petrol costs are squeezing real incomes yet further. In time the price will correct, but it might be painful getting there.

Source: Thomson Reuters Datastream, as at 5.6.18

Trumping trade: the return of protectionism

Trade wars were the dog that didn’t bark in 2017. Donald Trump arrived in Washington vowing to label China a currency manipulator and stand up for American workers as he turned his deal-making skills to global trade relations. Last year was a phoney war but this spring the drum-beat of protectionism has been louder. As ever with the President, it is difficult to see where he’s going with his on-off-on-again tariff announcements but the imposition of steel and other levies looks worryingly indiscriminate. China is his main target, but Europe and Canada, which account for more than a quarter of US trade, are also in the cross-hairs. Trade wars are a lose-lose game. The peace and prosperity of the post-war era has been built on free trade and globalisation. It is not without its victims but, as Churchill might have said, it’s the least bad option.

Source: Thomson Reuters Datastream, as at 5.6.18

Past performance is not a reliable indicator of what might happen in the future. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment. For full 5 year performance figures please see Market data.

I would like to thank the many knowledgeable and experienced people within the wider Fidelity organisation who have helped me develop the ideas in this Investment Outlook. Although the views expressed here do not represent the shared opinion, or house view, of Fidelity’s investment team, the combined expertise of over 380 investment professionals in 13 countries is a very significant resource on which I have been able to lean. In particular, I would like to thank Bill McQuaker, Portfolio Manager, Ayesha Akbar, Portfolio Manager, Sonia Laud, Head of Equities, Gary Monaghan, Investment Director in Hong Kong, Jeremy Osborne, Investment Director in Tokyo, Matthew Jennings, Investment Director for UK equity, Leigh Himsworth, UK Portfolio Manager, Adrian Benedict, Real Estate Investment Director, Curtis Evans, Head of Investment Directing, European Fixed Income, Kasia Kiladis, Investment Director, US, Rebecca McVittie, Investment Director, Emerging Markets, Natalie Briggs, Investment Director, Europe.

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