Geopolitical risk is the theme for this latest episode of Cool Heads. From trade wars to Brexit, it’s top of mind for many long-term investors. That said, it is important not to be carried away by hyperbole - uncertainty may be entrenched at the moment, but it is perhaps not as extreme for markets as some periods in the past, such as the financial crisis and the dot com crash.

The US-China trade war is rumbling on and the two sides are expected to face years of further negotiation. But the tentative ’phase 1’ agreement between the US and China could herald a fragile truce in the months ahead, and a positive shift in the narrative could bring relief to some currently unloved areas of the market, such as European and Japanese banks. 

While China is the opponent attracting the headlines, trading relationships between the US and Europe are also souring. As the EU steps up its pursuit of taxes on outsized US tech profits, the White House, already agitating over Airbus subsidies, has threatened to retaliate by raising tariffs on European car imports, which could be a blow to Germany’s already weak economy. But the European Central Bank continues with its dovish policy in order to stimulate growth. 

The cloud over UK assets has been all encompassing since the Brexit referendum, but seems increasingly likely to lift if there is a peaceful resolution. A potentially expansionary budget could bolster the prospects of domestic companies. 

Overall the environment remains uncertain and investors should tread with care. Along with classic safe haven currencies the dollar and the yen, we think gold looks attractive. With real rates so low, the significant opportunity cost from holding a non-yielding asset such as gold is diminished. The price of gold is negatively correlated with real rates, and most central bank heads have their hands hovering over the easing lever. And while global macroeconomic activity looks a little shaky, gold may find support from investors seeking to reduce exposure to cyclical assets.

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