The Best Bet for Investors in the Face of U.S.-China Trade War

Posted by Daniel Pellard on Dec 17, 2019 1:30:53 PM
Daniel Pellard
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Businessdictionary.com defines ‘trade war’ as an economic conflict that stems from excessive protectionism – wherein one country increases tariffs or similar trade barriers against another country’s imports in response to the increased tariffs on the former’s imports by the latter. Here, the tariff is the tax levied on imported services or goods.

Presently, the world’s two greatest economies, i.e., China and the U.S. are seemingly ready to rush into a trade war. And, what’s sad about it is that no one can predict how badly this would jeopardise them as well as rest of the world.

As of July 2018, a bevy of Chinese products were smacked by a 25% tariff by the U.S., making them 25% costlier for the Americans. While the intended rise was applicable to Mexico, Canada and Europe too, it actually commenced the so-called trade war.

To respond to this escalation, China targeted the American agriculture industry by imposing a tariff on 545 products, 90% of which belonged to the agriculture sector. The automotive industry was the 2nd on the China’s list, followed by petroleum, coal and medical products.

The U.S. president proposal of imposing an all-new $200 billion tariff on Chinese product in mid-2018 further set the stage for more such escalations from both sides, which eventually led the Chinese commerce ministry to file a complaint against the U.S to the World Trade Organisation (WTO).

This means, it is quite likely for us to see retaliative response from China in the near future, which will probably be observed as enhanced volatility in the international equity markets. Interestingly, the economic conflict between the two nations can be beneficial to some, while being somewhat damaging to several others.   

Winners and Losers of the U.S.-China Trade War:

Winners:

  • American aluminium and steel manufacturers: Imposition of 10% on aluminium and 25% tariff on steel imported from China protected domestic manufactures in the U.S. by creating more jobs and increasing production.
  • Meat processors: Soybeans observed a drop in the tariff, but US meat processors received a boost. Revised tariffs ensured that feedstock soybeans would be less expensive.
  • Chinese consumers: Out of 545 products, China chose US goods that can be replaced domestically. This ensured controllable impact on the economy.

Losers:

  • American Consumers: American consumers were more dependent on Chinese products than Chinese are on American products.
  • American heavy equipment manufacturers: The goods that were hit by 25% tariff increase included aircraft. Boeing earns a descent share of its revenue from China. Likewise, Caterpillar has more than 20 manufacturing units in China.
  • American Tech companies: Many tech companies have their manufacturing or assembling units in China, including Apple. US Bull market heavily depends on technology, which means any disturbance in the tech sector would impact the global equity markets.

What Investors Can Do to Remain Least Affected?

Given the high possibility of the conflict between the two nations getting intensified in the coming months, it is quite likely that its aftereffects would be felt across Europe and other parts of the world. In such a scenario, alleging that the safest place to invest currently is the UK’s domestic market does make a lot of sense. This particularly holds true for the companies that are exclusively functional in the UK.

As already discussed, there will be some great winners, but at the same time, there will some big losers too if the looming trade war aggravates. However, predicting the end result at present can be a risky feat. Owing to the growing concern among investors over the intensifying trade war, more and more UK-based domestic companies could be seen registering their entries in the FTSE 100 Index.

Here are the details of a few UK domestic stocks that can largely be considered attractive, given the prevailing economic conditions.

  • Centrica (CNA): An integrated energy company, Centrica offers a range of business and home energy solutions. It is involved in the sourcing, generating, processing, storing, trading, and supply of energy and related services. Centrica shares pay a dividend of over 7%. 
  • ITV (ITV): A broadcasting service provider, ITC creates and disperses content on different platforms within the UK. Its shares pay a dividend of over 4%. 
  • Next (NXT): Engaged in home shopping, retailing and customer services management operations, Next’s retail stores deals in womenswear, menswear, and kids wear along with housewares. The company’s shares pay a dividend of over 2.5%.

Download Full Report For Trade Wars

This blog post is written by Daniel Pellard , Director at Clear Capital Markets, Senior finance professional with 10+ years experience in a front office environment.
Chartered MCSI, FCA CF30 Registered, Fully RDR Compliant (Valid SPS)

Areas of expertise:
wealth management, portfolio management, HNW private and professional client relationship management, long/short and hedging strategies, risk management, equities, cfds, options, private equity.

Topics: investment, Impact Investment, investment advice, angel investors

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