The Week in Review 17/11/2019

Updated: Jun 21, 2020

According to a report published last year, 98% of students in the U.S. don’t regularly read a newspaper. Their rationale is that technology allows them to easily access the latest media via Twitter, Apple News, or other online applications. In truth, I think the real reason is that it can be hard to digest. After all, why would a sixteen year-old student be interested in reading about the US-China trade war, if they have no understanding of the situation, and find the language used in newspapers or other media hard to follow. For that reason, The Student Investor is starting a weekly series known as “The Week in Review” (original, right?), to provide you with a simple, brief understanding of the main three current affairs that have been making the global financial world tick in the previous week. I hope you enjoy!

Issue #1: US-China Trade War

To give a very brief overview, there has been a trade war going on between the United States and China for over a year. If you weren’t already aware of this, it’s time that you are! It started because President Trump accused China of unfair trading practices and intellectual property theft (i.e. that China has forced foreign companies to hand over their most prized technology to Chinese companies — many of which are state-owned — in return for access to Chinese products). Since then, it has only escalated, and there have been many tariffs imposed from both sides.

Again, to break this down, a tariff is a tax on imported goods. The idea behind them is that, if the U.S. imposes a tariff on, let’s say, Chinese flat-screen televisions, it makes them more expensive for American citizens to import. Why would Trump want to do this, you might ask? Well, if he makes it more expensive for Americans to buy TV’s from China, people in the U.S. might decide that it makes more sense to buy televisions for cheaper elsewhere (preferably from U.S. companies). This would mean that China misses out on making lots of money from selling its TV’s, and the U.S. economy could grow, because Americans may choose to buy their TV’s in America. Clever, eh?

Well, since this started over a year ago, both sides have imposed tariffs on thousands of products, worth billions and billions of dollars. Both countries have inflicted tariffs on so many products that the U.S. published an official list in September this year of all of the products that were subject to an import tax. As an example, if a food manufacturing company wants to import American-grown soybeans, they’ll have to pay up to 25% more than previously, and likewise, if a clothing company wants to import Chinese shoes or nappies, they’ll have to pay a significantly raised price.

So, why is this relevant now? Well, the US-China trade war has an impact on just about everywhere in the world. China is the largest global exporting economy, and the U.S. the largest consumer. If Americans can’t buy products from China because of the tariffs, they’ll start looking elsewhere, which means that, for example, Japan or Vietnam might start exporting more goods to the U.S. This is great for these countries, because the more they export, the better. However, it could also worsen their relationship with China, because if people start looking to Vietnam for electronic devices instead of China, the Chinese aren’t going to be too happy. Hopefully that makes a bit of sense!

It could also lead to a global recession. If prices of goods are high, there will be low demand for them, and this could have devastating economic effects around the world. Jobs are lost, inflation occurs, and well, everything is a bit of a mess.

The trade war is also so important because it affects the stock markets massively. If Chinese companies can’t sell their products to their usual American consumers because the tariffs have made their products too expensive, their stock price will take a hit. Also, because there’s so much uncertainty surrounding the whole issue, it affects the confidence of consumers, which also has a knock-on effect on share prices.

So, what’s the latest? At the time of writing, Phase 1 of a peace deal is on the horizon, but is far from complete. Both sides seems to claim that a deal is close, but then Trump goes and tweets something stupid, and everything seems to be up in the air again. The likelihood of an agreement happening soon has boosted the U.S. equity market, and the S&P500 (the principle U.S. stock exchange) is at an all-time high. However, where the deal seems to be stalling at the moment is that the U.S. want intellectual property concessions and a stop to forced technology transfers (i.e. they want China to stop doing what effectively started the trade war in the first place)! And, as for China, they want America to roll back their tariffs. They’re demanding that Trump gets rid of the tariffs he’s imposed on Chinese goods, and so American’s will start to be able to import thousands of Chinese products again at a reasonable price. Seems like a fair request, right? Well, tell that to Trump and Co!

Issue #2: Brexit

Ah, Brexit. The dreaded B-word. The term that has left the world on the edge of its metaphorical political seats for the last three years. If you have no idea about what the potential British exit from the European Union means or what the process entails, make sure to read this article first!

Okay great, now that you’ve read a very simple article that details what Brexit means and what are the motives behind it, you have probably just as much idea about the situation as the majority of UK politicians! On a serious note, I’m not joking. What was supposed to be a six-month process that would see the UK lose its EU-status has dragged on and on and on, and the deadline to leave keeps getting pushed back. Most recently, Boris Johnson, the UK Prime Minister (never thought that I’d be writing those words together) managed to secure an extension until 31st January 2020. By then, he will have to have agreed a deal to leave the EU, or we leave anyway without a deal.

As you can imagine, the 3+ year saga of the ongoing Brexit issue has had a massive impact on the investment world. For those of you who are interested, this link is a great summary of how Brexit has affected the economy. However, in short, what’s important to remember is that Brexit has shocked the world’s financial markets, and for the next few years, it’s going to have a huge impact. It’s affected the global currencies, stock prices, as well as general confidence. This is largely down to the fact that about 70% of companies listed on the FTSE 100 (the main UK stock exchange), generate their revenues from outside of the UK, and because the world is so globalised. There’s so much uncertainty and that affects the majority of consumers, investors, and companies around the world.

Brexit is increasingly relevant as, the closer the UK gets to the (hopefully) final deadline to leave the EU, the more tension, uncertainty and action there’s going to be! The GBP (Pound) did see a rise in value this week, after Nigel Farage, leader of the Brexit Party, announced that his party would not contest the 317 seats that the Conservative party won during the last election. Instead, Farage and Co. are focusing on taking seats from Labour and other parties. This has only increased the probability of Brexit taking place with a deal, which explains the gain in the pound.

Issue #3: Saudi Aramco’s IPO

Saudi Aramco is an oil company, owned by the state of the Kingdom of Saudi Arabia. It was decided that the company would be listed on a stock exchange for the first time, in a process known as an Initial Public Offering (IPO). The Crown Prince of Saudi Arabia, Mohammed Bin Salman, believed that the company should be valued at $2 trillion USD, which would make Saudi Aramco the largest IPO in history, overtaking companies such as Alibaba, Visa and Facebook. Yet, today, it was announced that Saudi Arabia has put a value on the oil company of between $1.6 trillion and $1.71 trillion USD.

What does this mean? Well, first and foremost, Prince Mohammed isn’t going to be a happy man! Investors around the world believed that his valuation of $2 trillion was too high for the company. They thought that a lower valuation of around $1-1.5 trillion would offer a similar return on their investment to other global oil companies such as Royal Dutch Shell PLC and Exxon Mobil Corp. Now, as a result, the prince is going to have to rely largely on investors within Saudi Arabia to invest in his company.

Furthermore, while initially assumed that the company would offer about 5% of its ownership to the public (which would mean the other 95% would remain owned by the state), it now looks more likely to be a figure closer to 1.5%. Saudi Aramco will publish its final valuation and share prices on December 5th, so make sure to keep an eye out for that, but in the meantime, the key takeaway from this news is that:

  1. Saudi Aramco is a very big oil company owned by the state of Saudi Arabia.

  2. It is going to go public, meaning investors around the world will be able to buy shares in the company.

  3. It’s valuation is lower than what the Prince of Saudi Arabia expected.

  4. The company will not be listed in the U.S., Canada, Japan, or Australia.

Finally, in the words of Matthew Martin and Javier Blas, “no matter what the final valuation, the share sale will create a public company of unmatched profitability.”

Thanks for reading, and please leave your feedback below! Make sure to stay tuned for next week’s update!

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