The world looks set to be on the brink of a trade war.
In one corner is the United States, the heavyweight which holds most of the trump cards in this looming fight as it is fighting from a position of strength due to the strong US economy.
In the other corner is China, the European Union and Mexico. The likes of Canada, Japan and Turkey are readying their boxing gloves as well to join in the fight.
While US President Donald Trump imposed a 25% levy on US$50 billion of “industrially significant technology” imports from China on 15 June, China fought back with a similar 25% tax on US goods such as farm products, automobiles and energy. In response, Trump has threatened a 10% tariff on an additional US$200 billion worth of Chinese goods.
We see increasing risks that the Trump administration’s threat to impose tariffs on another $200 bn of goods from China could actually take effect as President Trump is feeling little pressure to back down from his ongoing battle with the Chinese leadership over trade policy.
President Trump is unlikely to blink first. He is feeling emboldened to hang tough in his dealings with China, given his high approval rating among Republican voters, the continued buoyancy of the US economy and the relatively muted reaction in US equity markets thus far to the increased threat of protectionism.
The initial round of tariffs was quite confined.
But the next round could hurt more and the punch will be more significant.
This would naturally affect confidence and supply chains.
All these may sound very scary from a macro point of view, but how should the layman investor play his cards during this period?
Here are some tips for investors.
Finding shelter when the titans clash
1. Adopt a cautious asset allocation stance
Bank of Singapore has reduced the risk in our asset allocation in recent weeks by holding more cash and reducing equity risk.
Risk has to be managed during this period of high uncertainty while investors stay nimble so that they can adjust their portfolios if and when situations get worse.
Typically a balance portfolio should have about 40% equities, 38% bonds, 14% in alternative assets – hedge funds & private equity, and 8% cash.
2. Add portfolio hedges
A diversified portfolio is the first line of defence against a major threat of a trade war.
Investors cannot ignore such threats even though a full blown trade war is still not a baseline outcome. Investors should consider adding some portfolio protection such as put options on risky assets like equities.
If there is a sudden shift away from trade confrontation, risk assets would bounce sharply. This is why we have largely chosen to put on temporary hedges rather than change our long-term positions.
3. Avoid stocks exposed to the frontlines
Based on the first round of tariffs, investors should avoid sectors such as the US agriculture, US autos, chipmakers and semiconductors.
China is the world’s largest market for automobile producers and exporters will face the impact of reduced Chinese demand for American cars if tariffs kick in.
They would also have to pay more for imported steel due to the new levies which will be imposed on purchases from Canada, Mexico and the EU.
These tariffs could apply not just to carmakers but also manufacturers of e-scooters and personal mobility devices, both of which are becoming increasingly popular in Singapore and around the world.
On the agricultural front, reports in the US have said that everyone from cheesemakers and soy bean farmers would be hit.
4. Turn to domestic-orientatd companies
Any fallout from a trade war is likely to hit large listed multinational companies more as it is the global MNCs that dominate global trade.
Investors may need to evaluate how vulnerable the companies they invest in are to trade risks and adjust their investments accordingly.
During this period, it may be more prudent to look at companies with a lower foreign exposure insteadDisclaimer applicable to recommendation
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