The mounting trade tensions between the United States and our trading partners have significantly increased the volatility of global markets. My recent experience meeting with money managers in Seoul and the upcoming meeting in Singapore, as well as the perspective of our portfolio management committee, is invaluable in navigating these turbulent times. Our committee met to discuss if any changes are needed to be made to portfolios considering the recent trade tensions, and we want to share our views with you.
The recent escalation of the trade tariffs was set in motion in January of this year. The US began focusing on trading inequities as President Trump approved a tariff on solar panels and washing machines. In February, the US announced it was considering tariffs on steel and aluminum. In early March, these tariffs were imposed, but Mexico and Canada were supposed to be granted exceptions that were later rescinded. In late March, the President suggested more tariffs may be put on Chinese exports of approximately $50 billion. Within hours of the announcement, China announced it will impose tariffs meant to combat the initial tariffs on steel. Sparing you the details, there has been a series of back and forth measures targeting wine, pork, soybeans, cars, and chemicals on China’s side and mostly technology and investment on the US side … the rhetoric has continued to escalate as well. (Timeline source: Tradevistas)
We believe, as it stands right now, the tariffs which have been imposed will not have a significant impact on the economy. While bolstering American steel, companies like Harley-Davidson, have chosen to shift production overseas. These are headline-grabbing events but are relatively minor on the scale of the global economy. What is unclear, is how much further this will go. At some point, a major disruption in trade will stifle growth. Both sides are posturing very offensively, and many other countries are also reacting to the increased tension. Chinese President Xi Jinping reportedly told a group of American and European CEOs recently “In the West, you have the notion that if somebody hits you on the left cheek, you turn the other check. In our culture, we punch back.” On the American front, our President doesn’t lack an aggressive posture either, mostly delivered through tweets. We believe this is more posturing, but there is no shortage of ego in global leadership positions. We hope cooler heads will prevail. Paul Ryan said it well, “There are unquestionably bad trade practices by nations like China, but the better approach is targeted enforcement against those practices. Our economy and our national security are strengthened by fostering free trade with our allies and promoting the rule of law.”
So how big is the trade deficit? There is no denying it has been increasing. The chart below shows how significant it is when we talk about manufactured goods. What the chart doesn’t reflect is the export of $242.7 billion worth of services in 2017 in areas like banking, travel, and tourism. (Source: BBC News – Trade wars, Trump tariffs and protectionism explained) America has made a shift over the last many years. We have leveraged inexpensive labor overseas for manufacturing and have shifted to a service economy. An Apple phone, by these numbers, is an import because, although it is developed in America and the company is American, we rely on Asian chip makers and labor force to build the product. Is that really an import to America? I don’t think so. The numbers are gray.
From a portfolio management standpoint, the volatility is a factor of the trade conversations. There is no doubt it is having significant impacts on returns. On March 22, when the S&P 500 was down 2.52%, (Source: Bloomberg) the Wall Street Journal published, “U.S Stocks Sell Off on Concerns about Trade.” On March 26th, just a few days later, the S&P 500 was up 2.72% (Source: Bloomberg) and the corresponding article was “U.S. Stocks Surge as Trade Worries Ease.” What is worth noting is reacting to the news by selling after the pullback would have locked in losses and missed out on the subsequent increase. Furthermore, it’s true American capital and goods have had a much harder time going overseas than foreign capital and goods have had coming to America. If this is a short-term trade war, and the long-term global economy is more open as a result, then these events could end up being a positive development economically.
This is one reason we are not making an immediate shift in our portfolio allocation currently. It would be impossible to time these moves short term. Fortunately, my meeting in Singapore is on Friday, and I will gain more insight on the potential medium and long-term implications. If it proves to pose too much risk, we will make changes as we see fit. As always, our team is here to help, and we are diligently working to review the situation. We are fortunate to have our seasoned Chief Investment Officer, Beth Tremaine, reviewing portfolios and our Portfolio Management Committee will continue to review risk and look for opportunities. Please don’t hesitate to reach out if you have any questions.
Have a safe and enjoyable 4th of July!