Investing Amid The Noise Of Trade Wars


  • While some tariffs have gone into effect, many are still waiting in the wings. However, global investment markets are already experiencing knock-on effects, and the path forward seems uncertain.
  • As all parties seem intent on staying the course, the path forward seems to point toward more disturbances from trade wars. Investors should be mindful that some sectors – especially commodity-exposed industries – will likely be caught in the crossfire. However, some domestically oriented sectors or industries – like utilities and telecommunications – may prove more resilient.
  • Given the difficulty in anticipating the full impact of tariffs, Ben Lofthouse explains that investors should remain diversified, with different sector exposures, different regional exposures and some different currency exposures.

By Ben Lofthouse

As investors consider how to weather the storm of trade wars, Ben Lofthouse explains that diversification - among sectors, regions and currencies - is crucial.

So, understandably, we have been receiving a lot of questions recently on trade wars and the potential impact of those. So I thought I would just do a quick update to discuss where we are, potentially where we might go in terms of negotiations and trade wars developing, and what one might do about it and how it might affect sectors and the market.

So first of all, we have had a number of different tariffs announced, mainly between the U.S. and China. Some of those have taken effect already, a relatively small amount, and the rest of them will take effect toward the end of September. So in terms of the actual impact, we haven't seen a lot of those impacts yet, because companies aren't yet feeling it. So they are getting prepared for it, and as they report, we will start to get a little bit more disclosure on that. But at this time, it is fair to say it is more noise than anything else.

What we have seen in markets is where the reactions have been, things like currencies, so we have seen the Chinese and the European currencies, for example, falling against the dollar. We have seen the Chinese stock markets falling in value in recent weeks, partly in response to some of these tariff announcements. But the U.S. market has been relatively robust, so we have seen somewhat of an asymmetric reaction around the world to different markets.

In terms of it going forward, I think if it stays this path, and I think the assumption, you have to plan for perhaps it staying this path for now, because clearly both sides seem to indicate that they are not going to blink. So I think what one has to look at first is those sectors that have the most impact. So I think what people have said something already are things like the automotive sector, so particularly, for example, companies that produce in the U.S., like BMW (OTCPK:BMWYY) and Daimler (OTCPK:DMLRY), and send it to China, they get directly caught by some of these tariffs. So they are indicating that they might have an impact already. Things like the shipping industry and steel industry and some of the commodities industries, so free commodities, some of the prices there have been affected. So we have definitely seen an impact there.

In terms of going forward from here, looking at sectors that get less impacted, domestic sectors, such as utilities, telecommunications, obviously have less inputs that they import from outside of a country, so whichever country they are in, they tend to be less impacted. Sectors such as the oil sector are more impacted by global growth, and so if trade war continues and it starts to impact the global growth, then we could see an impact on demand, but they are not obviously the most affected in the first set of things. And some of the kind of unknown impacts are the things like retailers who might import something from outside of the country, so particularly for a region like the U.S., a lot of toys are made in China, will they be able to pass on those increased prices via the tariffs to consumers, and if they can't, will it affect their margins?

So I think what you start to get into pretty quickly is rather than it being straightaway kind of a macroeconomic issue, it becomes quite relevant to sectors and quite hard to anticipate in some cases, because we don't know exactly where all the inputs to sectors are coming. So the best approach to it is probably to stay pretty diversified, have different sector exposures, different regional exposure and some different currency exposures. And as I say, kind of there are sectors, domestic sectors, that get less impacted should we go to a worst-case scenario.

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The opinions and views expressed are as of 07/15/18 and are subject to change without notice. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. No forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes and are not an indication of trading intent. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. Janus Henderson Group plc through its subsidiaries may manage investment products with a financial interest in securities mentioned herein and any comments should not be construed as a reflection on the past or future profitability. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.

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