How trade wars could impact your investments: five experts, five views, July 2018

Having returned from Russia and performed a volte-face on his CIA/FBI comments, Donald Trump is set to meet with European commission President Jean-Claude Juncker next week as the two look to find a solution to escalating trade war tensions.

Trump has threatened (and in some cases enacted) trade tariffs on goods from China, Mexico, Canada and the European Union in his bid to make America great again. 

With the IMF warning a trade war could result in a global recession, we asked a number of experts what the impact could be on our investments. Here's what they said:

Julian Chillingworth, Chief Investment Officer, Rathbones

“We don’t believe this tit-for-tat exchange will lead to a recession in the West or the East. As things stand, the first $34bn of tariffs would have a negligible impact to the GDP of both nations. Even if the additional $200bn of tariffs are added, it would still be relatively small in effect: $250bn is about 8.5% of total US imports.

“China is carefully trying to deflate a balloon of debt that has expanded throughout its economy, from property to the stock market. A trade war adds another level of fragility that the nation’s leadership would probably rather avoid. Still, while this may mean it’s a good time for Mr Trump to win a few concessions and settle down back to the status quo, underestimating China’s strength could be extremely dangerous. China appears to be playing a much longer game. A ban on UK beef was lifted last month and just last week China reduced tariffs on thousands of Indian goods. By phasing the US out of its trade market and pivoting to other countries it could erode the global clout of an increasingly insular America.”

Kristina Hooper, Chief Global Market Strategist, Invesco

“Tariffs are like bacteria in a petri dish — they multiply quickly. The rhetoric is creating economic policy uncertainty, which has historically dampened business investment. Protectionism also stands in the way of progress. It’s an economic principle that countries should specialise in the production of goods and services in which they have a comparative advantage in order to grow their economy most effectively, thereby creating the most jobs. Protectionism doesn’t create jobs, in my view — it destroys them by making the economy inefficient. Shielding the US steel industry may save a few steelworkers’ jobs, but I expect a ripple effect that increases input costs, hurts the economy and results in job losses.”

In terms of portfolio positioning the fixed income team believes some sectors are more immune to a potential trade war than others. For instance, it said the US healthcare sector is unlikely to be impacted, because hospitals and care are domestically-focused. Meanwhile, it said companies which have international supply chains, but their goods are bought domestically, would be most at risk.

“Our analysis flagged the global auto sector as being the most exposed to trade barriers, with global consumer products next on the list,” it added. “Given the scale of automotive exports – Europe alone exported $682 billion in 2016 – we believe trade barriers have the potential to be a source of significant disruption in this industry.”

Andy Rothman, Investment Specialist, Matthews Asia

“Trade concerns are weighing on investor sentiment, which impacts stock prices, but the underlying fundamentals for China remains strong. Call it a trade tiff, dispute, pat or squabble, but we believe the tariffs imposed so far by President Trump do not (yet) rise to the level of trade war.

“The tariffs announced, and the Chinese response, are troubling. But, when you look a the numbers, the macroeconomic impact is likely to be insignificant. The ongoing rebalancing of the Chinese economy has already made it far less dependent on trade and more focused on domestic demand, which should mitigate much of the impact. Instead of targeting the US in retaliation, the Chinese could lower tariffs and market access to other countries instead – America's competitors.

“When it comes to our portfolios, we are focusing on Chinese companies selling Chinese goods and services to Chinese consumers.”

Luca Paolini, Chief Strategist, Pictet Asset Management

“When trade breaks down, everybody loses. Our calculations show a full-scale trade war between the US and China – which we still think is unlikely – would tip the global economy into stagflation and lead to a sharp decline in world stocks. Our model, which is based on IMF estimates, shows that if a 10% tariff on US trade were fully passed on to the consumer, the resulting rise in global inflation could in turn reduce corporate earnings by 2.5% and global equities could fall by some 15-20%.

“Under such circumstances, the shares of Chinese exporters and cyclical US stocks would probably suffer the most. However, the impact would be felt far beyond the world's two largest economies. In some instances, open economies such as Taiwan, Korea, Singapore, Hungary, the Czech republic, and Ireland could be more vulnerable.”

John Malloy, manager, RWC Global Emerging Markets

“The threat of protectionism to emerging economies has been a continual theme under the Trump administration. The initial measures announced in March will barely affect China. The plans to impose tariffs of 25% on steel and 10% on aluminium will likely have little consequence, as metal exporters to the US are less than 1% of total Chinese exports. Brazil and Mexico will be slightly affected by these measures as the countries represent 13% and 9% of US steel imports respectively. China's retaliation, and a further 25|% tariff administered by the US on up to $50 billion of Chinese goods, will potentially have more of an effect.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the experts and do not constitute financial advice.

Published on 18/07/2018