Jul 3, 2018

US China Trade War Escalate. What should Investors do?

The US steel tariffs initiated by President Trump on major trade partners was initially thought to his bluff leverage concessions from trade partners, especially China. Seems like Trump is serious about his threats and the tariffs went ahead. Major trading partners put together a list of tariffs ranging from orange juice and whiskey to inflict pain on the agricultural support base that has propelled Trump to power. With another round of US tariffs of $34 billion worth of China goods going to take place on 6th July, the world turns their sight onto the Chinese government and their counter response to the tariffs. The Chinese government has already indicated that they will not step down and with Trump seemingly going to fight to the end, a major global trade war seems to be looming on the horizon.

Cautious about the impact of a potential major trade war between US and China, investors pulled money out from China with both the China stock market and Chinese yuan taking a bit hit.

In an attempt to calm the market, Chinese authorities have announced that they will step in to manage this "irrational" market and to prevent a market panic which was previously seen in 2015.

Meanwhile, the US stock market remains stable as investors believe that the US economy is strong enough on its on that any loss of exports to major trading partners will be compensated by the stronger domestic market.

What Should Investors Do?

To prevent the escalation of a trade war, one of the party involved must back off. However, in this case, it will be difficult. Trump is carrying out his election promise to punish trade partners, especially China, for exploiting the Americans and his personality is aggressive and combative. On the other hand, the China government cannot show weakness and "losing face" in a public spat is one of the cultural taboo for the North Asian culture. Currently, the chinese economy seems to be taking the brunt of the damage in the early days of the trade war and it is expected to get worse for the Chinese if the stock market is any indication of the final outcome. With political ego and face at stake, it will be difficult to predict the outcome of this trade war, and investors should hedge themselves in the best and worst case scenario.

So what should investors buy as an "insurance" in an escalating trade war? The answer is, the US dollar. Should the China economy slow down considerably, the stock markets and currencies of Asian nations will take a great hit. With the Europeans also at trade war with US along with European interest rates, buying into Europe will not offer much protection for the Asian investors. The USD acting as an insurance will also be helpful as an opportunity fund to buy into the Chinese stock market should the trade war end abruptly as one party decides to bow out due to political stress. 

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