Independent Strategy

3 in 1

Fragmentation of trade and world order go hand in hand and are set to worsen. China will not help the world return to a more balanced growth picture; it cannot fix its own supply overhang and demand deficit. But China’s continued export of deflation will support global disinflation and help western central banks ease policy in due course. The manufacturing capacity overhang with its locus in China will continue to depress profit margins in industries competing with China. Tariffs are unlikely to change that picture much. The flip side of this picture is to boost the defence sector that seeks to counter Chinese and Russian global dominance. The defence sector is now at the pinnacle of global technological advance.  This week is likely to mark a significant increase in the US tariffs on Chinese goods (particularly EVs) and the risk that sanctions are extended to Chinese banks for facilitating trade in support of the Russian war machine. The latter could potentially be bad news for markets. The question is to what extent the Europeans follow suit (after all Chinese EV exports are USD15bn compared to USD0.5bn for the US). There also hangs in the background the continued escalation in the South China Sea with the possibility of serious confrontation about the Scarborough shoal quite likely in the near term with a question mark over US involvement under its defence treaty with the Philippines which has been redefined to include defence of Philippines territorial waters.

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