How to position your portfolio for US-China trade wars

Founder and Publisher of the Switzer Report
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The other week, Citi’s economics team informed the market that they thought the chances of a “no trade deal” scenario had gone to 60%. This guess is at odds with Wall Street and all the stock markets that play follow the leader, which, given their lack of negativity, is telling us that a deal is expected.

On the flipside, hopes of a deal rose when US President Donald Trump tweeted that China had called and wanted to restart trade talks. Better still, Reuters reported that Chinese Vice Premier Liu He, who has been leading the talks with Washington, said that China was willing to resolve the trade dispute through “calm” negotiations, and opposed any increase in trade tensions.

All this is great but we know that things can change quickly in Trump-land. And what Donald and China giveth, Donald and China can taketh away.

I’m still prepared to bet on a deal being had but if you are getting nervous that a trade war escalation and a Mexican standoff between the US and China is looking more likely, it’s very understandable.

Some geopolitical experts think the Chinese could decide to wait out the President on the hope that the November 2020 election will deliver a Democrat leader of the USA. This could trigger a stock market nosedive and potentially tip the US and the global economy into recession.

Given this worst-case possibility, how can you position your portfolio?

If you wanted to play an old-fashioned defensive strategy, then stocks such as Wesfarmers (WES), Woolworths (WOW), Coles (COL), Invocare (IVC), Transurban, Caltex (CTX) and Sydney Airport (SYD) are classics. But they have been snapped up over the past few months, creating what has become known as “expensive defensives”.

In case you might be thinking you’re too late for these stocks, this is what the FNArena consensus of broker analysts think are the future for these shares.¹

  • WES -10.3%
  • WOW -15.1%
  • COL -5.5%
  • Syd -5.4%
  • IVC -6.5%
  • TCL -3.3%
  • CTX +9.7%

That said, if a stock market crash happened, these stocks would better resist the gravitational pull of the panic that happens when share players start looking for exits.

Recently, I’ve discussed with my financial planning clients the idea of betting on a trade deal, waiting for another leg up, which the Wharton Business School’s Professor Jeremy Siegel says could be a big 10-15% spike! (By the way, Donald Trump studied economics at Wharton, which is seen as being in the top five business schools in the US!)

After the leg up, then go very income-oriented where we might sell low dividend-paying overseas stocks and funds to load up on local income payers which come loaded with franking credits.

The four banks, Telstra, IAG, AGL, Aurizon, Suncorp are classic targets for high-income chasers and they come with good franking credits.

If you don’t want to take the responsibility of picking your stocks, then specialist dividend funds could do the trick.

My Switzer Dividend Growth Fund (SWTZ) has not delivered in the growth part of its promise but the yield has even surprised me. Last year, based on a unit purchase price of $2.59, 20.4 cents was paid in quarterly dividends, which was a net yield of 7.9% or a grossed up yield of 11.2%.

This was miles more than I expected but it was a special year for dividends. If this fund returns 5-6% plus franking credits, then it has done its job for those who are ducking for cover from the trade war, looking for income.

Vanguard’s High Yield fund (VHY) exchange traded fund, which has had a great couple of years, has an 8.92% return over 10 years and could easily be blended with SWTZ to give some income diversification.

Another listed income fund that could be added to the mix is the ETF called the e-Invest Income Generator Fund (EIGA), which has a different investment approach to SWTZ and VHY. This adds to your potential diversification around a desired theme, namely, chasing income to offset any potential capital loss from a trade war that hots up rather than cools down.

The pluses with the above diversified income strategy is that even if bad market news is delayed for two or three years, these ETFs would also benefit from a rising stock market, albeit at a slower rate compared to growth stocks or funds.

But hell, being a nervous Nellie has to come with a bit of a price!

¹ Source: FNArena. Broker forecasts as at 30 August 2019.

 

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