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Wednesday 17 July 2019

Few stocks and shares will escape unscathed if trade war ramps up


President Donald Trump holds his signed memorandum on intellectual property tariffs on high-tech goods from China.
President Donald Trump holds his signed memorandum on intellectual property tariffs on high-tech goods from China.

William Heffernan

Stock markets have moved sideways since February despite solid earnings data, strong economic growth and good underlying fundamentals. This year has seen a significant uptick in market volatility relative to 2017 - with the major factor being a changing trade policy dynamic. US President Donald Trump paid little attention to trade issues in 2017. However, this year has seen a significant ramping up in both his actions and rhetoric on trade. Trump's moves around tariffs, and the response of China and Europe to those tariffs, has created uncertainty around the world economy - and for investors.

Last March, Trump announced tariffs on steel and aluminium imports. At the time, the US was attempting to force a favourable renegotiation of the North American Free Trade Agreement (Nafta) and these measures were assumed to be a tactic to incentivise Mexico and Canada to make a better deal. The Canadian response - and indeed world leaders' response at a fractious G7 meeting - was to counter with their own tariffs. Since then, the US has also ratified imposing tariffs on $50bn of Chinese goods.

The Chinese have responded in kind. Trump has now directed his officials to draw up a list of a further $200bn of Chinese goods, which may be subject to import tariffs if China retaliates.

Undoubtedly, some of the US complaints are valid, in particular when it comes to State assistance, uncompetitive practices, and structure in the Chinese economy. But when looking at the overall picture, Mr Trump's argument of the US economy losing out at the expense of others does not hold up.

The latest data from the World Trade Organisation has shown the EU's average trade-weighted tariff is 3pc, while Canada is about 3pc and the US is 2.4pc. (A trade-weighted tariff is where the tariff is weighted according to the actual magnitude of trade that one country does with another). The EU has a 10pc tariff on cars but only 15pc of US cars shipped to the EU were subject to it as US cars that contained European tariffs were exempt. The US has only a 2.5pc tariff on car imports - but a 25pc tariff on imported light trucks (pickups) since 1964. Europe does have a substantial trade surplus with the US but when you simply look at the service sector, it is the US that has the major surplus.

In the shorter term, trade is likely to continue to dominate headlines. This means that, despite relatively small tariffs so far, it is the uncertainty around tariffs which will affect equity markets the most. If it continues to drag on, investor and business sentiment will become more bearish, capital spending and investment plans may be postponed or cancelled, and consumers will become increasingly skittish.

So where do investors look to invest in a market such as that? One only needs to look at what has happened over the last few weeks. Small caps stocks - traditionally more focused on domestic markets - have outperformed the wider market. Defensive sectors, such as telecoms and consumer staples, have enjoyed a substantial revival. Likewise, US treasuries and European core government bonds have proven a relatively safe haven to hide in. The same can be said of certain absolute return or market-neutral strategies.

While economic growth is as strong as it is and the tariffs implemented remain small in nature, one can expect those trades to continue to perform. However, if for any reason, both the rhetoric and the actual measures ramp up, it is likely there will be few sectors or assets that escape unscathed.

William Heffernan is senior research analyst with Cantor Fitzgerald (

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