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Last week, British Prime Minister Theresa May called on members of London’s parliament to “hold their nerves”: As of 29 March, Great Britain will no longer be part of the European Union. However, as the UK Parliament has now once more rejected May’s Brexit deal in a vote on Thursday, it is still not clear what relations between the former Empire and the EU will look like in the future.

Economic data recently provided a glimpse of the Brexit consequences. Gross domestic product (GDP) rose by only 0.2 per cent between October and December 2018 compared to the previous quarter (Source:Nationales Statistikamt (ONS), 11.Februar 2019). In December, production by British companies declined for the fifth consecutive month, with carmakers and the steel industry in particular cutting back production. As the Brexit approaches, experts see the uncertainty businesses are feeling increasing reflected in the investment mood. Even in the event of a compromise there would be a noticeable slowdown over the course of the year.

The magnitude of businesses’ uncertainty is already very much evident: instead of manufacturing the next generation of its SUV model X-Trail for the European market in England as planned, Japanese car manufacturer Nissan will manufacture the model in Japan. Ford is also making arrangements for moving its production from the UK. Aviation and arms corporation Airbus is threatening to shut down factories in the UK in the event of an unregulated EU withdrawal.

 “Deal”, or “No Deal”?

Without a proper Brexit treaty the British would suddenly be subject to World Trade Organisation (WTO) rules only. A recent study by the Salzburg Centre of European Studies shows  (Source: „Brexit: Folgen für Österreich und die EU“,6. Februar 2019), that a Hard Brexit would not only harm the UK as a business location, but would also result in an estimated immediate drop in the UK industry’s production of up to 7.6 percentage points compared with the previous year. As a result, production in the Austrian industrial sector could decrease by up to 4.5 percentage points, while Germany could suffer a 4.2 percentage point decline. The estimates for France and Italy are even worse.

A study by the Halle Institute for Economic Research (IWH) and the Martin Luther University of Halle-Wittenberg concludes that 612,000 jobs globally would be at risk after an unregulated Brexit: “In Austria, 2,000 jobs could be affected directly, and 4,000 jobs indirectly,” says study author Oliver Holtemöller. The study assumes that Britain’s imports would decline by 25 per cent as a result of an unregulated EU withdrawal.

With the – for now – once again rejected Brexit agreement, little would change economically until the end of 2020. The British would have to continue to comply with EU law, but no longer participate, explains Stefan Griller, Professor of European Law at the University of Salzburg. According to the university’s projections, this scenario would have a much smaller impact on industrial production in the UK and EU countries.

Conservatives, however, are particularly opposed to the border regulation between Northern Ireland and Ireland laid out in May’s deal. The EU does not want border controls between Northern Ireland and Ireland. The British, on the other hand, do not want border controls between the British mainland and Northern Ireland. A supplementary agreement to the Brexit treaty could at least partially mitigate this issue. But in order to negotiate such an agreement, Theresa May not only needs her members to “keep calm”, she also requires more time and the members to support her work. However, this the UK MPs clearly refused in the vote on Thursday. Furthermore, the PM also lost support among her own party again, which not only weakens her negotiating position in Brussels, but ultimately also makes a regulated and thus smoother Brexit less likely than ever.

Legal note:
Prognoses are no reliable indicator for future performance.

The stock markets returned in January with a brilliant development. Following the sharp price losses in the fourth quarter of the previous year - especially in "raven-black" December - statements by the US Federal Reserve regarding the development of key interest rates fueled the price increases. Investors feared that excessive interest rate hikes could stifle growth in the US and even lead to a recession. Added to this were other uncertainty factors such as Brexit and the US trade conflict with the main trading partners. The central bank has now clearly relativised its positioning. Currently, no interest rate increases are expected for 2019.

YOU INVEST funds: Sticking to equity quotas was rewarded in January

Sticking to the equity ratio in January has paid off in the YOU INVEST funds. We've been in recovery, and the allocation to emerging markets and corporate bonds in high yield has also helped. As the reported company results also have a positive effect at present, we are sticking to the equity quota of 80 percent of the maximum quotas and weight the US slightly more strongly. At the sector level, after the harsh setbacks, we see opportunities, at least in the short term, for equities of information technology and small cap stocks. The IT sector was again added to the portfolio and the small cap sector was held in Europe. The percentage of Great Britain and Japan was reduced. At the moment, the momentum of the recovery seems to come from the US.

Disclaimer:

Forecasts are no reliable indicator for future developments.

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Warning notices in accordance with the Austrian Investment Fund Act:

The funds of the YOU INVEST range may invest significant parts of their assets under management in the shares of investment funds (UCITs, UCIs) as laid down in sect. 71 of the Austrian Investment Fund Act of 2011.

Since this is a blog, we do not update the data and facts of the respective entries. They are in line with our knowledge at the time of going to press. For the current data and facts in connection with funds, please refer to the information in the section “Reporting”.

Heads of state, high-ranking economic experts and business leaders came together at the World Economic Forum’s annual meeting in Davos, Switzerland, to exchange views and opinions. Amid concerns about the Chinese-US trade war, Brexit and a looming economic downturn, this year’s WEF meeting saw numerous calls for increased international cooperation.

The International Monetary Fund (IMF) opened the meeting prominently, warning in its “World Economic Outlook” about an impending downturn of the world economy. Against the background of the trade dispute and other uncertainties, the outlook for the global economy has dimmed somewhat, the current IMF forecast finds. The global GDP growth estimate has been reduced to 3.5 per cent this year and 3.6 percent for 2020, where the forecasts still lay at 3.7 per cent respectively in October.

“A global recession is certainly not yet imminent,” said IMF Managing Director Christine Lagarde at the report’s presentation in Davos. “But the risk of a stronger decline in global growth has certainly increased.”

“The slowdown seems to be coming sooner than expected," IMF Deputy Managing Director David Lipton told Reuters TV. While the economy is still doing well, there are numerous risks, ranging from trade disputes to poorer financing conditions, Lipton said.

Merkel bangs the drum for multilateral cooperation

Against this background, several heads of state called for increased international cooperation and a renunciation of protectionism in Davos.  Germany's Chancellor Angela Merkel called for further free trade agreements, explaining that she is seeking allies for multilateralism: “Anything else would lead to misery,” Merkel emphasised, adding that she would like to see a reform of the major international organisations to reflect the massively increased influence of economies such as China or India.

Japan, which currently heads the group of the 20 largest industrialised and emerging countries (G-20), also spoke out in favour of strengthening the multilateral order. “Japan is determined to maintain and develop free, open and rule-based international order,” Prime Minister Shinzo Abe declared at the WEF.

Without naming the US, Abe called for confidence in the international trade regime to be restored. The World Trade Organization (WTO) has an important role to play as the guardian of free trade. However, US President Donald Trump, seeing his country badly treated by the WTO, went as far as to threaten the US’s resignation.

China’s Vice President Wang Qishan sees international trade regime seriously endangered, criticising that many countries were looking inwards more and more, putting a damper on international trade and investment, while unilateralism, protectionism and populism are increasing. Wang described economic globalisation as an “inevitable trend”. Wang emphasised the enormous potential utilizable, if the individual countries’ competitive advantages were exploited and economic ties strengthened. In response to the challenges facing the world, he declared that countries must take this course of action jointly and actively.

Wang made no mention of the ongoing trade war with the USA in his speech. A scheduled meeting in Davos to discuss the trade conflict with US President Trump was not held due to Trump’s cancellation at short notice. However, Trump’s was not the only prominent cancellation: France’s President Emmanuel Macron and UK Prime Minister Theresa May also did not attend the WEF this year due to domestic political problems. Austria was represented by Federal Chancellor Sebastian Kurz and Foreign Minister Karin Kneissl.

Disclaimer:

Forecasts are not a reliable indicator for future developments.

As hopes for an end to the trade war between the US and China increase, the stock markets reflected the sentiment with gains at the outset of the new year. After recent talks between representatives of the two countries in Beijing, the leading US index, Dow Jones, gained almost 3 per cent by Friday. Major European stock indices such as the DAX or the Euro-Stoxx-50 also gained between 2 and 3 per cent. Outperforming them, Austrian stock index ATX even gained over 6 per cent since the start of the year. However, while the stock markets saw the most gains during the eagerly awaited talks, the unresolved differences after the end of the negotiations halted the positive development again.

Negotiators from China and the USA met in Beijing for talks in the second week of January. The negotiations to end the trade dispute were originally scheduled for two days, but were then surprisingly extended, to close scrutiny by the markets. These were the first direct talks since US President Donald Trump and China’s Head of State Xi Jinping had agreed a 90-day break in the customs dispute at the beginning of December after a series of escalating mutual punitive tariffs in the billions.

Progress after negotiations, but many differences still unresolved

Both countries reported constructive talks. China’s Ministry of Commerce stated that the talks fostered mutual understanding and yielded a basis for addressing the concerns of both sides. Yet despite the initial progress, much work still needs to be done to end the trade war.

According to the US Department of Commerce, China has kept its promises to buy “significant quantities” of US products and to allow more service deals. According to the Wall Street Journal, progress has been made regarding additional imports and the opening of the Chinese market to US capital. However, differences remain over issues such as protection of intellectual property and subsidies for Chinese companies.

During the talks, the Chinese government agreed to open its market to further genetically modified grains, which was considered a sign of progress as the US had been demanding this for years. According to insiders cited by the Wall Street Journal, the trade talks also paved the way for possible further higher-level negotiations. A possible next step would be a meeting between China’s Vice Premier Liu He and US Trade Representative Robert Lighthizer. US President Trump could also meet China’s Vice President Wang Qishan for talks at the World Economic Forum in Davos.

However, time is of the essence. In December, US President Trump had promised to provisionally suspend the announced further increase in US punitive tariffs on Chinese imports to the tune of USD 200bn until 1 March. If no agreement is reached by then, the dispute could escalate again, which could impact not only the economy in China and the USA, but also some European countries hard.

Meanwhile, Trump’s policy continues to make headlines in other areas. The trade dispute between the US and the EU recently saw some progress after high-ranking representatives of both sides came together to discuss an agreement. However, the conflict over possible US punitive tariffs on European cars is not yet resolved, and neither is the dispute over Trump’s planned border wall to Mexico, which is preventing the adoption of a budget law by Congress. As a result, most of the federal authorities have been shut down since 22 December.

Disclaimer:

Forecasts are not a reliable indicator for future developments.

At their meeting in Vienna on Friday, the OPEC+ countries agreed on a production cut. Starting in January, the daily production volume will be reduced by 1.2 million barrels (1 barrel = 159 litres) for six months. Of these, the OPEC countries are cutting 800,000 barrels per day, with Saudi Arabia alone providing a 500,000-barrel cut. The 10 leading oil-producing countries outside of OPEC, which form OPEC+ together with the oil cartel, are to cut a further 400,000 barrels, with Russia reducing its output by 130,000 barrels per day.

Iran, Venezuela and Libya are exempted from the agreement. The production cut will be upheld for six months, and reassessed in April 2019.

At present, the 15 OPEC members alone produce around 33 million barrels of oil per day, covering around one third of the world's crude oil production. According to the International Energy Agency, however, the demand for 2019 is only 31.3 million barrels of OPEC oil per day, and current production levels are already based on a daily production limit of 32.5 million barrels. The restriction has been in effect since the beginning of 2017 and was only extended in June 2018 until the end of the year.

With this cut, OPEC aims to stabilise the crude oil market. However, analysts are sceptical about the cut and its proposed effect. According to market experts, around two million barrels of oil – almost twice as much as announced – would have to be withdrawn from the market every day in order to achieve a sustained positive effect on the oil price.

The reduction was also met with criticism in the USA. US President Donald Trump had already spoken out against possible production cuts in the run-up to the official decision, writing that OPEC would hopefully not cut their production. “The world does not want to see, or need, higher oil prices,” he added in a Tweet.

Brent bounces after 30-per-cent drop since early October

Following the decision, oil prices rose sharply on Friday in accordance with OPECs intentions. After the agreement was announced, Brent saw a 5-per-cent bounce and climbed to just over 63.0 USD. In early trading on Monday, the price pulled back a little to around 62.0 USD. Viewed over the year as a whole, however, the Brent oil price still shows a minus of just under 7 per cent. Since early October, the price has dropped by a whopping 30 per cent.

The fact that the lower price of crude oil does not manifest in lower petrol prices for car owners seems paradoxical at first, but is due to the low water levels of rivers important for the oil market. Refineries and depots distribute most of the processed crude oil by ship, but since river levels are very low this year along important waterways, ships can only travel to a limited extent or not at all. This hampers logistics and requires oil deliveries to be increasingly shifted to rail or truck, which is expensive and only possible to a certain extent due to limited capacity. This leads to a shortage of petrol and consequently to higher prices at the pumps.

Disclaimer:

Forecasts are not a reliable indicator for future developments.