Have we learned anything about investing from the World Cup? Perhaps it’s that nothing is a sure thing – ask Germany, Italy, Spain, etc. The analogy for investing is that no investment is guaranteed, so diversifying away some risk is really important.
Apart from diverse spread, buying quality assets while trading below their long term ‘value’ usually results in a resilient portfolio. Though ‘value’ usually shines when markets recede it’s been unrewarded in recent years as the US stock market breaks records, defying gravity.
It may be an example of the ‘greater fool’ theory – hoping someone will pay more, regardless of underlying value. Instances of ‘greater fools’ are starting to emerge now in the property market. They may also be brewing with cyclical resource stocks, which rose significantly last year against Industrials, yet Industrials have been much stronger over 10 years.
Navigating through Trade Wars
As in our ‘Investing amid Geopolitical Change’ blog, the rules-based order that has underpinned expanding global trade since the mid-1900s is being eroded. Capitalism may have swung too far as Jo Citizen now feels insecure, facing a growing wealth gap and unreliable employment. But in all but a few geopolitical events, it usually turns out best not to falter. Is this one different?
A US/China trade war seems increasingly likely and its market impact might be amplified since most investors seem to think it won’t materialise. We may soon be enlightened on this as the US begins collecting higher tariffs on $50bn of Chinese imports from July 6th. While its direct impact may be small, indirect effects may not be.
China stands to lose more than the US because US exports are such a large part of China’s GDP. China’s capacity to retaliate on tariffs is also limited as it imports much less from the US than it sends there. However, China has many more levers; it might stop buying US debt (Treasury bonds), depreciate its Yuan to boost competitiveness or even restrict rare earth exports to US tech companies.
US companies are not immune as about 40% of their revenue derives from exports, so US profits could suffer. Many US export companies also rely on input goods made in China, so tariff changes may also bite at home via supply chains – as Harley Davidson recently confirmed. Meanwhile China’s tariff changes target Trump-friendly US electorates.
Will it end in tears?
In brandishing political power, Trump scoffs at conventional economics. But many agree that his failure to reconcile negligible US savings and its huge consequent debt with its trade deficits is likely to end in tears. Meanwhile, his bullying on unfair trade conceals China’s relentless progress towards technological and military supremacy, occurring first in our part of the world. China plays the long game, while Trump looks inward for kudos at home. Elsewhere, Putin slyly positions his pieces with democracy, Europe and the US in mind. If he’s underestimating them, Trump may be trumped.
But back to investing, should you take some profits from your Australian and overseas shares until things become clearer? If you do, you must then pick a time to buy back in so you’re not disadvantaged. Though last minute negotiation aims to head off the July 6th tariff rise, ahead of November’s mid-term election Trump may feel voters like his pugnacious global trade style. If so, any concessional deal may have to wait – by then we’ll be in a trade war with heightened risks.
What’s an investor to do?
As we wrote in our last blog; Geopolitical events are usually best ignored as their effect tends to pass with time. History suggests that if you rush to cash at every looming threat, you lose more in rejected returns than you save. While this risk of a trade war might be different it’s usually best to stay the course. Portfolio diversification can help make a smoother ride, while slowly tactically adjusting your portfolio away from expensive assets and towards value will serve well over time.