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Just how much of a threat is the trade war?



As the US and China bring out the big guns on trade, we look at the implications for investors and the wider economy.

3 min read

With trade tension between the US and China growing, we ask if it’s mere public posturing or genuine cause for concern.

On the surface there appears to be little to worry about. The all-important US economy continues to flourish and last week’s latest tariffs had no immediate negative impact on markets. In fact, stocks rose following the news. Investors had expected it for some time and factored it in accordingly.

The levies thrown at China by the US – and vice versa – could also have been bigger, which means both countries have left room for further negotiation.

But how long can the status quo last and how worried should investors really be?

Is Uncle Sam OK?

A key factor is how damaging it could all be for the US which continues to be the powerhouse of global economic growth. The general consensus from market analysts is that the trade war, in its present state, will not actually have a big impact on the US economy – and that’s good news for investors.

US exports to China accounted for less than 10% of total US exports last year, according to the Office of the US Trade Representative. China is still America’s third biggest export market, so is important to the country, but such a small percentage highlights the relatively limited scale of any trade war impact.

Meanwhile, current data suggests the US economy will remain healthy well into next year.

The ISM Manufacturing Index, for example, a key measure of how companies feel about the economy, beat expectations in August and showed a buoyant, confident manufacturing sector. A number above 50 is positive; the latest figure was 61.


How much US shares have risen so far this year*


Rise in US company profits expected by the market in 2018**


The percentage of total US exports that went to China last year***

* MSCI USA, dollar returns, as at 31 August 2018. ** FactSet & Raymond James, August 2018
*** Office of the US Trade Representative

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Markets widely expect the US Federal Reserve to raise interest rates this week and stick to its plan for one more hike before the end of the year. The central bank would not do this unless it felt the economy was – and would remain – in good shape.

Coutts Investment Strategist Lilian Chovin says, “In the US, people have jobs, companies are making money and stocks are rising. The economy is benefitting from President Trump’s tax cuts. And even if things took a turn for the worse, it would most likely take some time for the US economy to come down from its current highs.”

He adds, “While the trade war does represent a risk to the economy, the US’s strength currently continues to fuel global economic growth. This growth is slowing outside of America but we still see a reasonably positive environment for long-term investing.”

The US is also well-positioned to withstand threats from beyond its borders. Less than a third of US company revenues come from outside the country, according to Morgan Stanley analysis in June, and only 15% of those revenues are exposed to the emerging markets which have seen some weakness recently.

“In the US, people have jobs, companies are making money and stocks are rising. The economy is benefitting from President Trump’s tax cuts.”
Lilian Chovin, Coutts Investment Strategist
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Fuelling growth: A snapshot of the US economy

Our Exposure

At Coutts we access the US through our themes of technology and healthcare, along with broad market exposure to many of the larger companies.

Recognising the country’s current strength, we moved money to the US from our holdings in emerging markets and Europe earlier this year and our portfolios are benefitting as a result.

Since the beginning of August, US equities have outperformed their European and emerging market counterparts by 6.5% and 9% respectively, according to Bloomberg as at 20th September.

What happens next?

As we see it, there are three main ways the trade war might play out:

  • Trade talks reach a resolution by the end of the year. This is highly unlikely as the US has made clear it wants to deal with what it sees as an unfair trading relationship with China.
  • The dispute ramps up faster than markets expect. This makes investors nervous and causes stock markets to fall. While such a scenario cannot be ignored, we think it highly unlikely because of both countries’ apparent willingness to negotiate.
  • The conflict continues at its current pace throughout 2018. Officials continue to hold talks, markets monitor those talks and price-in the potential outcomes. The strong US economy absorbs any impact without trouble, while China counteracts any risks with economy-stimulating policies. We think this is by far the most likely scenario.

While the trade war is likely to remain on the radar of markets for some time, we ultimately believe that pragmatism will prevail because an economy-punishing conflict is in nobody’s interests.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

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