If you’re not prepared to bet that a trade war won’t happen, then you have to “play defence”, as the basketball TV commentators say, or even runaway, as my taxi-driver told me he did a few weeks ago.
You might recall that I suggested some weeks ago when Donald started tough trade talk around January 19 that nervous nellies might want to play defensive.
For me, I’ve been buying stocks at lower levels because I invest for the longer term and simply don’t think this bull market is over yet. That said, if a serious trade war happens, it could drag our beloved bull into an abattoir run by bears!
The professional view
Right now, US investor surveys are telling us that people like my taxi-driver (retail investors) are getting very negative on stocks. However, surveys of professionals (like fund managers) say they remain committed to equities. Of course, if the China retaliation and the Trump testosterone-driven responses heat up, then the pros can turn on a dime and dump stocks.
Phil Blancato, CEO, Ladenburg Thalmann Asset Management in New York, is in the ‘buying opportunity’ fraternity. Asked about the 10% plus dive in the Dow on CNBC, Blancato came back with: “This is your opportunity… we’re getting mixed up with the benefits of a tax cut and surge [in] earnings from it and in my opinion economic data is looking pretty good… this is the chance to re-enter the market.”
The interesting aspect of these Trump tariff tantrums could actually sustain the bull market even longer, provided no real trade war happens. The threat of trade retaliations has pushed Wall Street into correction territory and the Nasdaq has the fallout from Facebook as well.
Fed experts say the central bank is singing from the same confusing hymn book as everyone else when it comes to Trump, tariffs and trade war potential. Could this be a bluff from Donald to get more out of China before he meets Kim Jong-un!
“I think this might be a threat to ask for deals from China,” He Weiwen, a senior fellow at the Center for China and Globalization, a government-affiliated research organisation in Beijing, told Reuters.
Another opinion piece from Reuters says “China calls bluff on Trump’s trade warning — President Donald Trump’s warning regarding China’s trade practices is being taken with a pinch of salt in Beijing, with many officials believing Washington is unwilling to upset the trade dynamics between two of the world’s largest economies.”
But this was a January view and we now know President Trump has given most of his allies an exemption from his steel and aluminium tariffs, leaving China in his sights because of intellectual property theft.
The terrible tariff idea
And are we supposed to hit home runs for our wealth from stocks with these crazy curve balls being thrown from the number 1 ‘pitcher’ on the White House team?!
The question is: should you manage your money based on very positive data or potentially negative political posturing? What annoys me is that our market would be a lot higher if it wasn’t for this terrible tariff idea of Donald’s. Blancato thinks the tax cuts, and how they will add a couple of quarters of better profit growth and higher stock prices, have to be kept in focus. Of course, that’s without a trade war. And on that subject, he does think the positives of the tax cut will dwarf the negatives of the retaliation tariffs.
Damn Donald is making this hard for us.
On Monday’s Money Talks, my charts guy, Lance Lai from Accountancy Invests had our market up 8% in the near term, but his technical analysis can’t factor in Donald. See the interview here.
For a more cautious take on these trade troubles, Nigel Green, founder and CEO of deVere Group, says the “Trump’s trade tantrums are putting him on the wrong side of history.”
He is a free trade advocate, based on the history of success for economies that engage with it, and urged investors to review their portfolios to ensure that they’re properly diversified across regions, sectors and assets classes.
Emerging economies
There are many experts arguing that this 1st world trade battle could be good for emerging economies. Recall a few weeks ago I told you Ray Dalio, the genius investor behind Bridgewater & Associates, is extremely long emerging economies via ETFs.
Ed Keon, chief investment strategist at QMA is an ‘emerging economies will benefit’ advocate. “After underperforming for several years in a row, and having a decent year last year, emerging markets still look like pretty good values for us,” he told CNBC. “So we are overweight emerging markets across our multi-asset portfolios.”
One big emerging economies ETF – the iShares MSCI Emerging Markets ETF (EEM) – has a forward price-earnings ratio of 12.4, while the S&P 500 ETF is at 16.5.
Interestingly, EEM has some of the most heavily Asian stocks (supported by experts like Charlie Aitken), such as Tencent, Samsung and Alibaba. Last year, EEM posted its best year since 2009.
With all the uncertainty accepted, even with Nigel Green’s wariness, he still backs my approach to the current challenges. “See-sawing markets are a chance for investors to put new money into markets at lower prices,” he said. “A slump in the market often means that there are high quality equities available at more attractive prices.
“Of course, no–one knows for sure what will happen in the immediate future, but history shows that stock markets rise over a longer-term period.”
A serious threat
Right now, economists at the China Development Forum in Beijing are taking the tariff threat seriously. “There’s a lot of unease,” Larry Summers, who was the chief economist at the World Bank and a former U.S. Treasury secretary, told CNBC during the event. “A lot of unease about broad geopolitical developments, and a lot of unease around the conflicts of the last week.”
China has said 128 US products valued at $3 billion will be blacklisted, if the Trump tariffs hit Chinese exports.
The Trump tariff plans target up to $60 billion worth of Chinese exports.
“I don’t think we’ve previously at the [China Development Forum] felt like we might be on the brink of a trade war, and I think that certainly is a very unfortunate development,” added Summers, who previously served as president of Harvard University and the director of the US National Economic Council.
Nobel-prize winning economist, Robert Shiller says US companies are unprepared for a trade war.
“The immediate thing will be an economic crisis, because these enterprises are built on long-term planning, they’ve developed a skilled workforce and ways of doing things. We have to rediscover these things in whatever country after the imports are cut off,” speculated Shiller. “It’s just chaos: It will slow down development in the future if people think that this kind of thing is likely.”
Even with all this considered, and even with his preference for emerging economies, Keon still thinks US stocks will finish significantly higher. And given the recent correction, it’s totally believable, provided we miss out on a trade war.
Let’s hope Donald is just doing all this because it’s his art of the deal tactics.
Certainly, the world is not used to a guy like this leading America and, at the moment, stock players are paying the price.
But I’m running with the dip-buyer brigade and I don’t think it’s time for me to play DEFENCE!
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