We all know the global equity market has been on a straight-line incline over the last 12 months. Naturally, this makes us nervous. Therefore, we are spending considerable time pressure-testing our mental model of the world to identify potential scenarios that could mark the return of market volatility.

One risk we are considering relates to the potential for retaliatory policies enacted by the US government against China. While President Trump recently completed a relatively smooth Asian tour, during which he spent considerable time smiling and posing for photographs with President Xi, there is increasing noise which suggests 2018 may well be the year Trump gets tough on China.

Axios reported that US Trade Representative, Robert Lighthizer, recently presented to Trump’s entire economic team on the US-China relationship which he strongly believes is unfair.

The Wall Street Journal (WSJ) also reported that: “as the Trump administration’s chief trade negotiator, he [Lighthizer] is readying a barrage of punitive measures. Much of the U.S. political establishment, including both Republicans and Democrats, are cheering him on.”

The WSJ goes on to say: “Meanwhile, almost identical bills introduced in the U.S. House and Senate would limit foreign investment in U.S. technology companies and infrastructure on national-security grounds. The main target is clear: China. There’s a good chance that some version of this legislation will pass with bipartisan support, marking the start of hostilities.”

In recent days, the 2017 Report to Congress of the US-China Economic and Security Review Commission was submitted. This report focuses on the national security implications of the bilateral trade and economic relationship between the US and China; covering such issues as weapons, intellectual property, natural resources, foreign investment, cyber security, military modernisation and monetary policies.

The language in the report is unusually strong. Below is a selection of highlights that give a flavour of the current feelings towards China that are circulating Washington DC:

Upon reading this submission to Congress, one really is left with the sense that patience with the current nature of the US-China relationship is wearing thin. Should the two largest economies fall into a conflict, be it political, economic or – God forbid – armed in nature, then market volatility will almost certainly return.

As we have said many times in the past: volatility is only the enemy of the unprepared investor. We have positioned the Montaka portfolio conservatively in anticipation for the return of volatility and remain well-prepared to pounce on new opportunities as and when they present themselves.

Andrew Macken is Chief Investment Officer with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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