Portfolio planning amid trade turmoil

Thought of the day

by Chief Investment Office 06 Jul 2018

Trade tensions escalated further on Friday as the US implemented tariffs on USD 34bn of Chinese imports and China swiftly retaliated with counter-tariffs on 545 US imports with a similar value.

Asian equity markets recovered from early session losses on the well-flagged moves, but further escalation remains a risk. The Trump administration has previously warned it may ultimately target more than USD 500bn worth of Chinese goods, an amount equivalent to total US imports from China last year.

While the latest tit-for-tat exchanges have increased the risk of a damaging trade conflict that disrupts global trade, we believe that it is important for investors to remain invested in equities:

  • In the short run, global growth is good, with US growth, which is tracking at 3.8% in the second quarter, likely to remain strong. And after 9% growth in global earnings in the first half, we expect the year to end with 15% earnings growth.
  • In the long run being invested usually pays off. Historically, stocks have been almost 20 times as likely to deliver a positive 10-year return as a negative one.
  • A negotiated solution is still possible. While US/Chinese tariff implementation does not create optimism about a near-term breakthrough, elsewhere there are signs of potential progress. Press reports on Thursday suggested the EU may offer to negotiate a multilateral trade deal to eliminate most tariffs on autos to avoid a trade conflict between the US and the EU.

Remaining invested does not mean investors should take no action. Trade is just one of a number of risks, including central bank tightening, Chinese deleveraging, de-synchronised global growth and rising oil prices that contributed to increased market volatility in the first half and could do so again in the remainder of the year. Against this riskier backdrop, we recommend investors consider several courses of action including, diversifying single stock or country-concentrated positions; hedging equities to help protect against downside risk while retaining exposure to potential market upside; holding counter-cyclical positions; and investing in long-term secular trends.

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