We suspect that equities across Emerging Asia would slump once more if President Trump followed through with his latest tariff threat. Stock markets in Europe would probably be hit even harder than they have been so far too.
Meanwhile, although the S&P 500 has proved fairly resilient to trade worries so far, and has actually risen since they resurfaced in June, we doubt that this will last.
The retaliation by other countries to US protectionism so far has mostly been aimed at US farmers, not US multinationals. But that could change. In particular, we suspect that China will start to target US multinationals operating in China directly rather than imposing more tariffs of its own.
What’s more, even if this latest escalation in the trade war is somehow averted, we think that there are other reasons to be pessimistic about the outlook for equities in both the US and the rest of the world. Regardless of the direction of US trade policy, we think that China’s economy will lose more momentum over the rest of this year, and forecast that the US economy will slow sharply in 2019 as the cumulative effects of Fed tightening and the fading fiscal boost start to bite.
With this in mind, we forecast that the S&P 500 will fall to 2,300 by the end of next year, compared to just over 2,800 now, and think that equities in the rest of the world will fall sharply too.