Trump’s escalating trade war

Tom Stevenson
Tom Stevenson
Fidelity Personal Investing11 July 2018

Less than a week after Donald Trump fired the first shot in his America First assault on free trade, he has ramped up trade tensions even further.

Building on last Friday’s imposition of a 25% levy on $34bn of imports, the White House has announced a long list of 6,000 new items that will be subject to a 10% tariff from September.

It’s a wide-ranging list that includes: meat, fish and vegetables; drinks and tobacco; building products, chemicals and industrial products; consumer goods like lamps and furniture; and electronic goods such as TV components.

Very little has escaped the attention of the US tax-man it seems. Some of the more unusual items on America’s black-list include: badger hair for shaving brushes, postage stamps and bovine semen.

The market reaction has been notable, especially when you consider that investors have already had plenty of time to get used to the threat of further tariffs.

Markets in Asia were the first to react to the news, with heavy falls in China in particular. The CSI 300 index, which covers shares in both Shanghai and Shenzhen, fell more than 2%, back towards its recent 18-month low. Japanese stocks were more than 1% down.

European shares picked up on the nervous tone in Asia, with the FTSE 100 down more than 100 points, or 1.3%. The Stoxx 600 index, Europe’s equivalent of the S&P 500, fell by more than 1%.

Although the market falls are fairly broad-based, as they tend to be when investors seek a port in the storm, investors are starting to think about which sectors will be hardest hit by an escalation of trade tensions.

Mining companies are among the top fallers in London, as commodities prices fall heavily. Demand for metals is particularly impacted by activity in China, so a slowdown there could be bad news for the sector. Zinc, nickel and copper were down by 6%, 2.4% and 3.5% respectively in a bloodbath for commodity investors.

Glencore and Anglo American both fell by around 4% in early trades.

Markets had been pretty resilient in recent days as investors focused more on the upcoming results season than trade. Although earnings are not expected to match the tax-cut-fuelled 25% profits increase registered in the first quarter, results for the second three months of the year are still expected to be pretty strong.

With the banks kicking things off later this week, analysts have pencilled in earnings gains of around 20% for the latest period under review.

So the challenge for investors now is to work out just how serious a threat rising trade tensions pose to the global economy. And the trouble here is that we have little to go on, because for as long as most people have been alive the direction of travel has been towards more open, globalised markets. You have to go right back to the 1930s to find a similar period of protectionism.

When you do that, it is not a pretty picture. The imposition of the Smoot-Hawley tariffs in the US in 1930 are now understood to have greatly exacerbated the Depression and devastated living standards all over the world.

If the Trump administration is serious about following through with more tariffs (and the President seems deadly serious) then the reaction of America’s trading partners will be crucial. Unfortunately, it looks as if Europe, Canada, Mexico and, of course, China are just as determined not to look weak.

So far, financial markets have seen Trump’s rhetoric as bluff and bluster. When you consider that globalisation and collective security through US-led groups like NATO have underpinned global prosperity and progress for decades, America’s abandonment of the post-war rules-based systems of defence and trade should really have had a bigger impact than they have.

Perhaps, the markets are right that the President will have his way and America will succeed in creating a more level playing field on global trade. Perhaps, they are wrong and simply complacent about the risks.

Certainly, there will be some relative winners too. Services will tend to fare better than manufacturers. Domestically-focused tourism could benefit, supermarkets could be helped by modest food inflation, defence stocks might welcome an uptick in global tensions.

Given that no-one has a crystal ball, the sensible approach for investors is to reduce the risk in their portfolios. That means offsetting higher risk investments in equities and commodities with lower risk options in fixed income and cash.

The easiest way to do this is via a multi-asset fund such as the Fidelity Select 50 Balanced Fund, which is expressly designed to give investors a smoother ride with a well-diversified portfolio of high-quality funds.

You can hear more about the fund and its manager, Ayesha Akbar in the latest episode of MoneyTalk.

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