Recently the financial markets are jittery
over trade issues between the two largest economies of the world, China and the
United States. With figurative blows at each other, the markets are
experiencing a roller coaster ride of sorts. Over the past five days from 2 Apr
to 6 Apr, the S&P 500 index swung between 2558 and 2671 points1,
while our STI fluctuated between 3339 and 3445 points2.
While it is not confirmed whether some or all
of these tariffs will come to fruition, such news could bring butterflies to
most stomachs. Though some may consider these market swings as minor, in
reality we do not really know what is in store for investors in the future. So
in case of a trade war happening, what should we do about it?
Think Regional and Country
Though the atmosphere of the markets may be
pessimistic, there are some places in the world that are not affected by
tariffs totally. Since tariffs work on imports and exports, economics 101
dictate that if goods from a certain place get more expensive, it would be
natural to source them cheaper from another location. This “another location”,
in turn, would reap the benefits, ceteris paribus.
For example, Australia is seen as one of
the likely beneficiaries if a trade war happens, as it could provide what is on
China’s tariff list of American products, such as wine, steel, etc3.
Also, China’s proposed tariffs on American soybean imports may prompt Chinese
buyers to source the beans from elsewhere, which could be Brazil or Argentina,
the next largest producers4.
With this information, you could consider
investing in counters and ETFs that has exposure to these regions and countries.
Think Domestic
Ironically, we could also look at the domestic
markets of China and the United States. Sounds oxymoronic? Not really. Again a
reminder, tariffs affect imports and exports, so we could look at sectors and
companies in those countries that have minimal exposure to the items on the
tariff list.
Goldman Sachs recommended companies that
have large domestic sales exposure5. This seems to be a legitimate
reason as the revenues of such companies are not affected by trade wars, since
their customer base is mostly from within.
Thought, Final
Overall the strategy and maintenance of the
Bedokian Portfolio in terms of your preferred asset allocation, as well as the
basic rules such as the 12% limit6 still holds paramount.
Furthermore, we do not know if the looming trade war is ever going to happen. In
investing, the most important thing is to stay calm and react accordingly
should any event occurs.
1 – Yahoo Finance. S&P 500 Index, 2 – 6
April 2018. https://finance.yahoo.com/quote/%5EGSPC/
(accessed 7 Apr 2018)
2 – Yahoo Finance. STI, 2 – 6 April 2018. https://sg.finance.yahoo.com/quote/%5ESTI/
(accessed 7 Apr 2018)
3 – Neuman, Scott. Who Wins A U.S. – China
Trade War? Maybe Australia. National Public Radio. 3 April 2018. https://www.npr.org/sections/thetwo-way/2018/04/03/599081151/who-wins-a-u-s-china-trade-war-maybe-australia
(accessed 8 Apr 2018)
4 – Karuga, James. 10 Countries With
Largest Soybean Production. Worldatlas. 25 April 2017. https://www.worldatlas.com/articles/world-leaders-in-soya-soybean-production-by-country.html
(accessed 7 Apr 2018)
5 – Kim, Tae. Goldman Sachs says here’s
where to invest during a global trade war. CNBC. 4 April 2018. https://www.cnbc.com/2018/04/04/goldman-sachs-on-where-to-invest-during-a-global-trade-war.html
(accessed 8 Apr 2018)
6 – https://bedokianportfolio.blogspot.sg/2016/10/the-12-limit.html
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