Magellan chairman and CIO Hamish Douglass said tense US-China relations are here to stay, with neither side likely to blink in what has become a high-stakes game of trade-war chicken.
Speaking at the Magellan National Adviser Roadshow 2018 in Sydney today, Douglass painted a grim picture for global markets in light of tensions between the two superpowers. He said China could “wait the United States out”, and weighed up the chances of US President Donald Trump relenting on his demands and making a deal.
“For a deal to be done, it’s going to require Trump to take a step back,” Douglass said. “He’s got to really deal with the core issues for more than a cosmetic arrangement. It’s very likely that – if Trump thinks he can apply more pressure – the situation is going to get a lot worse.”
Two dire scenarios
Douglass also presented two macroeconomic scenarios for the short term, based on US Federal Reserve policy. One is the “goldilocks scenario”, with no material increases in US inflation, which could “bifurcate markets”; the other is that “the fed emerges behind the curve” and needs to stage a “material market correction” by raising rates, which could result in an “entirely foreseeable” 20-30 per cent market correction.
He said both scenarios had an even chance of happening.
It was the threat of a trade war between the US and China, however, that dominated the Magellan chief’s presentation. The world’s economic thought leaders, he suggested, were wrong to take a sanguine position on the matter.
“The markets have been incredibly complacent about this risk,” Douglass asserted. “Even people like Warren Buffett and Jamie Dimon are saying you don’t need to worry about this, Trump will do a deal with South Korea, Mexico and Canada. But I’m not so sure that reading of the situation is correct, I don’t know that he’s going to do a deal.”
Douglass revealed that the global threat to world trade figured heavily in Magellan taking a “cautious approach” and increasing its cash holdings “to a maximum 18 per cent”.
“Our long-term position is to take the safer options,” Douglass revealed. “We will never swing for the fences.”
US-based stocks make up 46 per cent of the equities in Magellan’s flagship Global Fund, the firm’s July 2018 update states.
The number one threat
After his presentation, Douglass sat with former US Central Intelligence Agency acting director Michael Morell and asked whether he believed China was a threat to the US.
“I do,” Morell replied. “I see China as the number one national security threat challenge facing the United States and our allies, of which Australia is an important one. If I were to make a list of the 20 or 25 [biggest threats to the US], China would be number one and there would be a huge gap to number two.”
He said the US and its allies had “three fundamental issues” with the Chinese: the two nations are now competitors for capital and labour; China poses a vastly increased military threat; and China wants to exert influence on the global stage equal to its power.
Morell said that last issue was the toughest.
“How does that get resolved?” he asked.
Morell was also sceptical about the chances of a trade deal between the two nations.
“It’s hard to see where an overlap would occur, where a deal would be possible,” he said, before warning that a “new cold war” might be on the horizon.