US stocks have seen volatility recently as the US and China trade talks drag on highlighted with President Trump increasing 10% tariffs to 25% tariffs, all along injecting more uncertainty. This has had negative impact on the recent Uber IPO which which was talked about in December, $120 billion floated but as it turns out, it came with a valuation below $80 billion – not a good start for this well documented and unprofitable company.
On Friday the stock ended down 7% as investors are still concerned about the impact on the Chinese, US, Japanese and EU stock complex. The stock complex is now tired and IPOs may be challenging in our view.
The current stock market and the decade-long period of low interest rates has pushed many investors into a “chasing returns” world in which they pour money into high-risk/high reward venture capital, as they look for the next Uber, Facebook, or other multi-billion dollar return. It is clear that the venture capital business is injected with new cash, each time the market seems to be slowing down.
The most important point is just how efficient the system can be. There is a balance in which these companies must raise capital in an environment while walking a fine line of growth over profits. So successful tech names will, as many have done in recent years, focus on taking market share will not being profitable. Netflix lost money and Uber has still struggled with turning profits. Amazon is a great example of a company that expanded on thin margins but has turned out to be a success story.
Here are some points that you and your friends can discuss about the global impact of geopolitics on equity markets.
1. US-China Trade Talks, in our view at Classiarius, are only going to result in short-term and temporary solutions as the trade deficit is driven by structural issues (difficult access and forced technology transfers – issues that will take 10 years or more to solve). Keep in mind, US growth is at 3.2% in GDP, and an all out trade war would cut 0.4% from this GDP. China will see 6.5% growth in 2019, maybe lower but the trade war will subtract 1.5%, according to analysts.
2. The European economy is likely to start seeing two speeds, slow and fast. The UK, French, Italy and selected countries like Poland will see stronger growth while Germany will experience economic challenges.
3. The breakdown of the global trade system, in our recent articles and audiovisual presentations, will continue. This leaves Iran and Turkey exploded and look at Venezuela, it is seeing economic collapse and like Iran, minus GDP growth. The issue with Iran, and Venezuela is that Oil rices would be impacted, this having a drag on global growth. Iran saw minus 2.8% in GDP last year, while it is expected to see minus 6.0% in 2019.
But back to the current markets….
The US trade war with China will intensify in the coming months and this may spell trouble for some of the new ideas, start-ups and possibly disrupt the flow of capital – think about the start ups that may be delayed in 2020 with a confrontation in the Middle East. But this is a story for another day.