Fair deals on China and Brexit could give economy a needed dose of confidence

Bridging gap of each side’s expectations is vital to progress, Martin Pelletier writes.

“This has been a long, arduous and, at times, fraught negotiation. We made it to the finish line because we learned how to work together.”

— Deputy Prime Minister Chrystia Freeland

I read a fantastic book this past weekend, Never Split the Difference, by Chris Voss. In it, Voss describes how human emotion is the driving influence when it comes to negotiations, with the primary focus being on what is fair and unfair.

Essentially, people comply with agreements when they feel they’ve been treated fairly and lash out when they don’t. Bridging the gap of either side’s expectations by acknowledging their concerns is essential to getting a deal over the finish line.

We see this playing out in today’s world with a renegotiation of existing global trade agreements, fiscal arrangements and/or partnerships.

The U.K. believes it is getting an “unfair deal” with the European Union, fuelling the Brexit movement; U.S. President Donald Trump is looking for a “fair deal” on trade with China; and here in Canada, Alberta is facing an economic crisis with Premier Jason Kenney in Ottawa earlier this week fighting for a “fair deal” for the province.

It isn’t a surprise that investors have been responding to this uncertainty by moving their funds elsewhere while businesses are sitting idle instead of reinvesting in future growth.

In Britain, the FTSE has been sold down to a 13 times earnings multiple compared to the average 15 times for its European counterparts. Britain’s private sector companies also recently suffered the largest drop in activity last month since the EU referendum in July 2016.

In the U.S., investors are reacting to the China trade war by selling their stock positions and moving into safer areas of the market including bonds and money market.

In total, investors have pulled out $135 billion from U.S. stock-focused ETFS and mutual funds this year, which is the biggest withdrawal on record, according to Refinitiv Lipper.

Concerns over the impact on China has especially hit the energy sector as we have noticed large moves on any news, development or speculation, which makes some sense given Asia is a big contributor to global demand growth. Unfortunately, the timing is quite poor especially considering the rollover in commodity prices since 2014. This has had a dramatic impact on the Alberta economy, which is not only contracting but may be getting worse if the latest Statistics Canada numbers showing a loss of 18,000 jobs in November are to be believed.

Interestingly, the rest of the country hasn’t been immune as real business investment including machinery, equipment and intellectual property products per worker have now fallen below levels recorded in early 2008, according to the Business Council of B.C. Total investment in plant and equipment by Canadian businesses has fallen 20 per cent over the past five years, the worst performance in 50 years, according to analysis by Fidelity Investments.

However, there may be a light at the end of the tunnel as Canada just got a piece of good news this week with a deal reached on the United States-mexico-canada Agreement (USMCA). This is a very encouraging development given the challenges experienced over the past year. “It’s going to make North America richer. It’s going to make Canada richer. It’s going to make Mexico richer,” U.S. Trade Representative Robert Lighthizer said of the new arrangement.

If these three countries could find an outcome all considered fair, perhaps there is hope for the China and Brexit disputes as well.

Given the response in the market Thursday after U.S. President Donald Trump sent an optimistic tweet — “Getting VERY close to a BIG DEAL with China. They want it, and so do we!” he wrote — a resolution could have a huge impact.

We think it is fair to assume that such a shot of good economic news might spark businesses to reinvest, something that both Alberta and Canada could really use.

Martin Pelletier, CFA, is a portfolio manager and OCIO at Trivest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.

CARLOS JASSO/REUTERS Deputy Prime Minister Chrystia Freeland speaks during a meeting in Mexico City on Tuesday when a new agreement was announced on the revised North American free trade deal, known as USMCA. The new treaty gives Canada a reason to be hopeful, says Martin Pelletier.