Equity investors facing uncertainty, volatility as path to de-globalization continues

Despite the Trump administration’s ongoing trade antics, U.S. markets appear to have calmed their jitters compared to the first quarter of 2018, but there are still rumblings below the surface, according to one expert.

David Jilek, vice-president and chief investment strategist at Gateway Investment Advisers, says institutional investors taking on a more active equity strategy will face a more complex environment heading into the later half of the year.

Read: Trump and the tariffs: What are the long-term impacts of shifting trade policies?

Capital expenditure rates have ramped up in 2018 relative to last year, says Jilek, noting companies are expanding, trying new ideas and generally changing the status quo. The more capital that a company puts towards new ventures, the more chances there are for investors to disagree about whether the new ventures will be successful, he adds. “Professional analysts now face an extra degree of uncertainty.”

As well, stock correlations dropped significantly in February 2017 and remained low for the rest of the year, but they now appear to be back at normal levels. In January 2018, for instance, the S&P 500 index had a correlation rate of nine per cent and shot up to 52 per cent in April.

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“This year assets are moving up and down more in tandem, so you’ve got increasing volatility,” says Jilek. “Plus, you’ve actually got companies for the first time in a long time investing for the future.”

This, coupled with the Trump administration’s path of de-globalization, could mean far more volatile markets that are harder to navigate in the coming months, he says.

“There is no precedent for de-globalization.” 

For years the world has been expanding through increasing ease of trade, with supply chains and businesses becoming more complex and entrenched in the interests and economies of an increasing number of countries, says Jilek. 

“Models analysts might use to mitigate risk have all been built in a world where constant growth of globalization was the reality,” he says. “I don’t know that we have the precedent for that for reversing the effects of globalization, so that’s an element of uncertainty as well.”

Read: Global growth on track for 2018, despite challenges: report