Over the last few weeks, I have been fortunate enough to spend “boots on the ground” time with our Alvarez & Marsal clients in both Mexico City and Asia. Our clients largely consist of institutional investors such as private equity funds, sovereign wealth funds and family offices as well as the portfolio companies in which they invest. While I am not an economist (although I sometimes play one on TV), I have gained valuable local insight as to how these investor groups might be impacted by the Trump Administration’s recent actions on global trade.
From my last piece on the public equity market’s volatility until now, market volatility has since risen significantly as a result of President Trump’s announcement of 25% steel and 10% aluminum tariff on certain imports. These tariffs placed, respectively, stirred fear of starting a global trade war. We’re seeing the markets swing several hundred-points both up or down on an almost daily basis and which was once a rare occurrence is now starting to become the “new normal.” At the mere mention or speculation of certain actions by President Trump, the market reacts forcefully, creating what I have recently coined a “vortex of volatility.”
However, and ironically said, the markets should come to expect this unpredictability by now. Melissa Francis, co-host on Fox Business Network’s After the Bell, recently commented in a March 2018 Wall Street Journal article “The Art of the Steel Tariffs,” “A recurring trick of [President Trump’s] presidency, and before it his campaign, has been to stir controversy with unexpected announcements.” To date, his actions on trade have been no different.
In Mexico, which is one of the largest importers of steel to the US, the newly announced tariffs were viewed largely as posturing for the more significant NAFTA negotiations. Uncertainty surrounding one of Mexico’s largest trading partners to the north, and regret over having not better diversified itself away the US, Mexican investors appeared much more concerned over the upcoming local elections in July than the possibility of a trade war with the US. For now, Mexico has been given a temporary exemption on the new tariffs, so it has become even less of a concern locally.
Investors in Asia shared a similar view to Mexico. Despite recently announced retaliatory tariffs on US imports, China’s reaction so far has generally been one of restraint. This may be the case for China because it’s about much more than trade imbalance. President Trump has made it clear that he wants China to open up its financial system to level the playing field for foreign firms and shore up protections of intellectual property. China so far as indicated the willingness to do so but ultimately it will come down to whether it really effectuates these changes. Asian investors do not appear overly concerned about getting into a global trade war, as the belief is that China has everything it needs within its borders and providing for the ability to make it on its own. Although debatable, the view in Asia was largely that China was not welcome by the US either as a trading partner or an inbound investor – the latter point further driven home by the US Committee for Foreign Investment in the US (“CFIUS”) and President Trump’s recent rejections of certain proposed China-backed acquisitions of US businesses.
On the surface, it appears that President Trump is sending the wrong message to foreign investors. According to Thompson Reuters data recently published in the Financial Times, “[Global] cross-border M&A activity in the first quarter of 2018 was at an all-time high, accounting for more than $511.7B in overall activity, which is up 76% from the same period a year ago.” In addition, it states “Chinese companies spent just $25.5B on overseas assets in the first quarter, while the number of deals fell to its lowest mark since 2005,” which resulted in a “decline of Chinese cross-border deal making into the US of approximately 15%.” This decline, however, cannot be wholly attributed to President Trump’s actions, especially as the capital controls put in place by the Chinese government last year to stem the flow of capital outside of the country are starting to take hold. Similar to CFIUS in the US, it is quite possible that China delays its own approval of cross-border deals, a retaliatory measure that could benefit US businesses. That being said, it is also likely that other countries outside of the US, particularly Europe, will start to benefit from the redirection of Chinese capital away from US investments given these factors.
Foreign investors have indicated that some of this market uncertainty and volatility may actually be a blessing in disguise, as it could create welcome buying opportunities by driving down asset prices from what have been near record levels. Accordingly, investors keeping their powder dry with a “wait and see” approach who capitalize on short-term buying opportunities may ultimately create the most value in the long-term.
Simply put… time will tell. Whether this is the case or not, there is one thing we are certain of: Uncertainty drives volatility and the Trump Administration knows how to stir it up.
To learn more about our Alvarez & Marsal Global Transaction Advisory team: https://www.paulaversano.com/
For more information about our global services: https://www.alvarezandmarsal.com/expertise/global-transaction-advisory
SOURCE: ALM VANGUARD: TRANSACTIONS - ACQUISITIONS CONSULTING JUNE 2019 REPORT
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