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US-China trade war sidelining news of economic disruption elsewhere

12 November 2019

Anthony Rayner, manager of Miton’s multi asset fund range highlights massive demonstrations in countries around the world which are affecting economic activity

There has been a lot of news coverage on issues like the trade war, and their implications for economic activity and financial markets. With all this attention and worry, it might be surprising to note that the US and Chinese equity markets are actually some of the best performers this year.

With the spotlight firmly on China and the US, much has been side-lined, including the massive demonstrations in countries as far apart as Hong Kong and Chile, not to forget what’s been going on in Lebanon, Ecuador and Bolivia.

There are many similarities between these protests. They have severely disrupted normal activity, including economic activity. Particularly countries such as Hong Kong and Chile, the protests were previously considered to be relatively stable and business friendly.

The protests in Hong Kong have been going on for five months now and have led to the withdrawal of the extradition bill, which initially triggered the protests. The much younger Chilean demonstrations have led to the president asking for the entire cabinet to resign while, similar to what happened in Hong Kong, the initial catalyst (the hike in metro fares) has been reversed too.

Despite some of these protests’ initial aims having been met, they mostly continue unabated. In fact, they have generally morphed into broader protests: in Hong Kong, from the extradition bill, to the bigger question of China’s rule over Hong Kong and, in Chile, from the high cost of living, to include inequality more generally and a corrupt elite.

It is tempting to draw similarities between the contexts for unrest, such as economic inequality and political corruption, but there are important differences in historical context. For example, in Hong Kong, the context has been a steady erosion of freedoms by China, while in Chile, the Pinochet era constitution is perceived to be seriously lacking. There is a common thread however around the imposition of unjust laws and a preference for a transparent democratic system.

So, what has it meant for these economies? Retail sales have recently collapsed in Hong Kong, while the economy has contracted in two consecutive quarters (technically a recession), with numbers that were much worse than expectations.

This is massive for the Hong Kong economy, though has much less of an impact globally, as Hong Kong represents less than 1% of the world economy. Turning to Chile, these are the largest protests since the Pinochet era, almost 30 years ago. The economic impact is tricky to assess, as its duration so far is a matter of weeks, rather than months. Nevertheless, while Chile is an even smaller economy than Hong Kong, it is by far and away the largest copper producer globally and strikes will have contributed to the recent spike in the copper price, as well as the marking down of Chilean financial markets.

We have no exposure to Chile, and the small exposure we have had to Hong Kong is to access the Chinese economy, rather than that of Hong Kong. Nevertheless, we recognise that both Hong Kong and Chile are not isolated. There are numerous other examples.

Just staying with Latin America, whilst widespread disruptions are limited to smaller economies like Ecuador, Peru and Bolivia, the larger economies of Brazil and Mexico look far from content from a sociological perspective.

Meanwhile, Argentina has just heralded in a populist Peronist government, after a small period of a business-friendly government, and the biggest IMF bailout ever. Venezuela too faces a desperate situation.

Limited media coverage has helped contribute to a relatively silent spring so far but these are signs of an increasing challenge to the current system and its seeming inability to foster societies that are more equal. Many thought that the financial crisis would see a recalibration of priorities across politics and societies, however this has not happened.

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