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The outbreak of trade wars look set to create some relative winners and losers in the world of equity markets.
Trade wars are apparently ‘easy to win’, according to US President Donald Trump. But it is clear that there will be winners and losers when it comes to markets. Or at least there will be those that do well relative to others. So while it is possible that trade wars prompt a contraction in global trade and economic growth, causing equity markets to fall, some may fall further than others. This is known as ‘relative outperformance’.
The most severe example of this was the tariffs imposed in the 1930s, brought in by Herbert Hoover in the wake of the 1929 stock market crash. These, known as the Smoot-Hawley tariffs after the elected US officials that sponsored their passage through the US legislature, resulted in tariffs on dutiable imports and rose from below 20% (in 1920) to almost 60% in the early 1930s. Arguably the only thing that dragged the US out of the resulting economic depression was World War II and the consequent boom in US production and consumption.
George W Bush imposed tariffs in the early 2000s as well, although not to the same extent as Smoot-Hawley. Then, steel tariffs of between 8% and 30% were imposed. The dispute went to the World Trade Organization (WTO), which ruled against the US.
These tariffs saw equities hit hard, with the chart below from Schroders showing the impact:
The worst performer was the German DAX, which has also suffered heavily of late as the new round of tariff wars gets underway. German carmakers, normally a source of pride for German industry, have become a point of vulnerability (along with other German firms that sell high quality consumer goods), as investors expect them to suffer heavily. BMW, Daimler and Volkswagen make up 12.4% of the DAX, meaning that it will likely endure a repeat performance of the early 2000s, underperforming the S&P 500 and other global indices, as well as perhaps the FTSE 100.
There may not be any winners as such in the indices space. But domestically-focused indices such as the Russell 2000 may do better than more international ones like the S&P 500. The thinking is that the small companies that make up the index will not be exposed to increased tariffs, and while they may see revenues and profits fall if the US economy slows, the effect may be less pronounced than for bigger firms that have to cope with falling international sales and a weaker performance at home. So far in June, this theory has held up, as the chart below from the Wall Street Journal shows:
Only time will tell whether the DAX and other indices with heavy weightings towards key exporters will suffer as they have in the past, or whether indices like the Russell 2000 will indeed do better than their internationally-focused peers. But these are certainly trends worth watching.
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