What happens if a trade war between America and China escalates?

What happens if a trade war between America and China escalates?

What happens if a trade war between America and China escalates? 150 150 Piers Bolger

Many clients have recently asked about what’s going to happen if the trade dispute between the US and China worsens. You want to know what impact it will have on your portfolio and investments, and what it means for equity, currency and fixed income (bond) markets.

In our view, the trade dispute is poor policy by the US administration. Increasing tariffs do not advantage anyone (country, corporate or individual) from a growth point of view over the longer term. In this interconnected world, the decisions the US are making will have a knock-on effect for growth in other countries. That ultimately flows through to individual companies and their ability to generate sustainable earnings and maintain margins.

Tariffs increase the input costs that businesses ultimately pay for the inputs they use to deliver goods and services to their customers. Businesses will be able to absorb this for some period of time, but ultimately they need to make a profit and will pass it on to the individual consumer. If consumers are paying more for goods and services they may choose to spend less. This ultimately flows through to equity markets and the broader economy.

To date, the impact has been relatively benign, but if the trade war continues we expect it to negatively impact economic activity globally. This will also flow through to the Australian market in particular because we supply a lot of our raw materials to China where many of these good are made.  

The biggest challenge for an investor in this situation is deciding what to do with your assets. Do you switch out of equities and move to more defensive asset classes like fixed income? Unfortunately, none of us have a perfect crystal ball, but from a broader strategy point of view, we certainly wouldn’t advocate that people move out of equities completely. The focus is about how you moderate your level of exposure to equities that are likely to be most impacted.

Partially as a result of this trade dispute, Chinese growth has slowed over the last six to nine months and currencies in emerging markets have depreciated substantially. While we believe there is a long-term growth outlook for emerging markets, we’ve been moderating our exposure to them to protect our client portfolios and better manage our investment asset allocation. We’ve also allocating slightly more into defensive asset classes, like fixed income.    

We’re watching this issue closely to make sure we have the right balance of ‘risk’ across our portfolios in the current environment. But if you feel a little nervous about your position in global equities and emerging markets at any stage, it’s important that you talk to your advisor about your positioning going forward.

Piers Bolger is Chief Investment Officer at Viridian Advisory

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