As the trade war intensifies and further threats are made, there may be opportunities for investors to steer under the climate.
Is the wolf at the door?
At the beginning of the year, the threat of trade war from the US, under the pretext of national security, was expected to be just negotiation leverage. However, in June, a tariff on $50 billion of Chinese imports to the US came into effect. Chinese retaliation has not been a smokescreen either causing further tariffs on $200 billion worth of Chinese imports to be threatened by President Trump.
Far from the two countries coming to the table and forging an agreement like many expected early in the year, more rounds of trade barriers have been announced with anticipation of further economic damage ahead and no resolution in sight. The tit-for-tat exchange of tariffs between the US and China has given the impression that two of the biggest economies are headed down the road towards a trade war, which would have hugely damaging economic consequences.
In the short term, tariffs would trigger weaker exports and more expensive imports, therefore driving inflation up. Even without tariffs coming into effect US inflation has been climbing since last year.
In the long term, tariffs could have a potential negative impact on productivity and put pressure on economic growth. The estimated disruption would have great impact on manufactured products, which make up 11% of the global GDP, because any disruption to supply and distribution chains, a key part of world trade, could have a lasting impact. In the worst-case scenario, companies such as Harley Davison, which has been vocal on the matter, may have to relocate factories or distribution centres to minimise the tariffs at the cost of lost economic efficiency.
The European Union, traditional allies of the US, has been dragged into tariff tension as well. In July, the US imposed a 10% tariff on imported steel from the EU and threatened to hike tariffs on EU car imports to 20% from 2.5%. The EU has begun preparing for its rebalancing measures without delay, rebalancing €2.8 billion worth of exports immediately with the remainder taking place at a later stage.
Though it is estimated that the tariffs would only affect about 0.4% of global GDP under current actions, the sentiment around trade tensions is likely to have a negative impact on the markets. Escalating protectionism may potentially overturn the global trade system with dire consequences.
For now, we are still hopeful that the escalation of the trade war or protectionism will not be severe enough to trigger a major global downturn.
What can investors do to keep the wolf out?
The following investment ideas are some that we believe provide investors with the right exposure to steer under the climate:
Good old fashioned shining gold could still be a reliable friend to lean on whenever there is uncertainty in the market.
Old Mutual Gold and Silver; this fund invests in both the physical metals of gold and silver and the mining equities. The manager aims to deliver 2-5 times the return of gold in a bull market and match the return of gold in a bear market.
Source Physical Markets Gold; the Source Physical Gold ETC aims to provide the performance of the spot price of gold through certificates collateralised with gold bullion which is held in J.P. Morgan Chase Bank's London vaults. The vast majority of the gold bullion collateral is held in allocated gold bars.
Of course, you may prefer to keep your holding in the US market, making funds seeking absolute returns even in the volatile market conditions potential options:
JPM Global Macro Opportunities; the objective of the fund is to achieve positive returns over a rolling 3 year period in all market conditions by investing in securities globally.
Old Mutual Global Equity Absolute Return; the fund is aiming to achieve capital appreciation while closely controlling risk.
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