Tariffs wars: possible winners and losers

Tariffs worries are back to stalk investors, but what will the impact be on global markets?

Data
Source: Bloomberg

Tariffs and trade wars are back on the agenda after a relatively quiet week on this front. On Friday 20 July, the issue returned to stalk global markets as US President Donald Trump announced that tariffs would be imposed on up to $500 billion worth of Chinese imports. On 21 July, the International Monetary Fund (IMF) said that a trade war would hit global growth by around 0.5%.

Ironically, the IMF’s warning may well have given investors greater confidence about the outlook for the global economy. It is hard to gauge the effects of a trade war, at least until years (if not decades) after it has happened. One estimate doing the rounds suggested a hit of 2-3%, based on the idea that the Global Financial Crisis hit world gross domestic product (GDP) by 6-8%. Thus, the IMF’s forecast was ‘less bad’ than expected. If investors have been factoring a hit of 2-3% of GDP, then the IMF’s forecast (which may of course be wrong too!) would suggest that global equities look more attractive than they did previously.

One vague positive (at least for now) from the trade wars is that the actual impact will not show up for at least one more quarters’ worth of earnings. While this means equities could continue to fret about the outlook, the near-term effect on markets may be slight. And by the time we get to the final quarter of earnings reports for the 2018 calendar year, then a resolution may have been found, or negotiations may be ongoing, which will mean that investors will be tempted to ‘look through’ any weakness in hopes that 2019 will see a better period for company reports.

Commodity markets may be the most affected by tariff wars, since price increases will be immediate, causing ripple effects around the globe on levels of demand and supply. Prices will likely find a higher equilibrium in the longer term, with markets adjusting in due course. Already China has begun to look for alternative sources of goods to replace US agricultural produce, but the sheer amount of agricultural output exported from the US, thanks to high levels of automation and economies of scale, means that alternatives such as Bangladesh and others will never be able to match US output in volume terms.

Since trade wars became a regular feature of the market news cycle, we have seen interesting trends develop in equities. Far from suffering because of their lofty valuations, tech stocks have become a ‘safe haven’ from tariff concerns, since their business does not require such old-fashioned elements as the movement of physical goods across borders. Also in favour are US small caps; the domestic focus of the smaller firms that make up the Russell 2000 has seen the index rise over 6%, versus a relatively flat performance for the S&P 500.

Trade wars are the great imponderable at present – how long they will last, what the size of tariffs will be and what the economic impact will be are all questions that cannot be answered at this point. But it looks as if even this worry is beginning to lose its impact. Like many other crises before it, the great equity bull market of 2013 onwards may survive the worries over trade wars too.

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