Trade wars have consequences. That’s the first lesson investors have learned over the past few months.
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We’ve written a lot about the U.S.-China trade war (you can find our latest updates on it here and here). Tensions have been escalating over the past few months. And on July 6, the trade war moved into its next phase as the U.S. imposed 25 percent tariffs on US$34 billion worth of Chinese exports. China quickly retaliated by slapping a similar tariff on US$34 billion worth of U.S. exports.
Investors saw this coming a long time ago. It’s why stock markets around the world, particularly in Asia, have been declining since U.S. President Donald Trump announced plans to slap US$60 billion worth of Chinese exports with tariffs back in March.
As the table above shows, major global markets have held up well in the face of escalating trade tensions. The S&P 500 has actually gained 3.1 percent over the last three months, while the MSCI World Index is still up by 0.6 percent. Even Hong Kong, despite its position as a trading hub, has seen the Hang Seng Index decline by just a modest 2.1 percent.
But the stock markets in the rest of Asia, as well as markets in the emerging markets (as represented by the MSCI Emerging Markets index), have all declined by significant percentages over the past three months.
The Shenzhen Composite Index lost 17.2 percent, as China’s exports are directly targeted by the trade war. Malaysia lost 10.7 percent, but that’s likely more a result of domestic political uncertainty.
But one market, Vietnam, has fallen by an even larger 24.2 percent during the same period.
That might sound surprising. But Vietnam has been the biggest beneficiary of the shift in Chinese manufacturing activity to lower-cost regions over the past decade. And while Vietnam hasn’t been targeted by U.S. tariffs, an escalation of the trade war could see it dragged into the fighting, considering its US$38 billion annual trade surplus with the U.S.
With the total value of Vietnam’s exports as a percentage of its GDP at a whopping 93.6 percent, any significant tariffs aimed at curtailing their exports to the U.S. – their largest trading partner – will be a hammer blow to the economy. That’s why Vietnam’s stock market has been the hardest hit by the escalating U.S.-China trade war.
What comes next
Despite the recent trade war selloff, markets all over the world are still up since Trump was elected in November 2016.
Even Vietnam is still showing an impressive 36 percent gain – beating out the gains in the S&P 500 Index and the MSCI World Index.
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Yes, the impact of the trade war is real. But the declines over the past three months have been driven more by sentiment rather than hard numbers. For now, it seems like an over-reaction.
There will likely be more tariffs before the year is over. China’s retaliation essentially forces Trump’s hand. He has already committed himself to raise tariffs on US$16 billion of additional Chinese exports. Plus, he’s threatened tariffs on US$200 billion more exports.
The longer the tariffs remain in place, the more time they have to filter through the supply chain and adversely impact demand due to higher prices. That has yet to be seen.
One good example is Tesla (Exchange: New York; ticker: TSLA). The electric carmaker just raised the price of its Model X sports-utility vehicle by US$23,000 after China imposed its 25 percent additional tariff on imported electric cars (now taxed at 40 percent).
That’s troubling for Tesla (which also faces a litany of other challenges). China is its biggest market outside of the U.S., accounting for 16 percent of overall deliveries last year. And it was also the fastest-growing market before the tariffs took effect – with sales doubling last year.
This is a big reason why Tesla recently announced it was finally opening a car manufacturing plant in China. But that would also put the company at increased risk of potential intellectual property theft, in a country where competition in electric vehicles is intense.
In short, we’ve only seen the beginning of the trade war. In fact, the end of the beginning isn’t even in sight. You can expect a lot more tough rhetoric, tit-for-tat tariffs and negotiating from both sides.
So how should you prepare for more volatility in the markets?
Start by diversifying your investments into different assets and geographically. This includes buying hard assets such as gold, as well as defensive stocks like utilities and basic consumer goods – ideally in growing economies.
Also, avoid borrowing money right now. You don’t want to be caught in a “forced sale” if markets plummet.
And make sure to put adequate stop-losses on your investments where possible. The best way to do this is to use a trailing stop. They help in protecting your gains from evaporating during steep market drops, and they limit your losses to preserve your capital for future reinvestment.
Finally, make sure you keep some cash on hand to jump on opportunities that open up during volatile periods.
Following these safety measures will help you sleep better at night, while keeping some skin in the game for what’s still one of the best performing periods for global stocks in recent history.
Editor, Stansberry Churchouse Research
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This technology is proving to be a vital antidote for escalating trade tensions because of its ability to improve productivity the way mass production boosted Ford Motors’ productivity in auto manufacturing back in the early 20th century.
And thanks to the selloff in global markets, the leading companies in this new technology are trading at their most attractive levels in recent years. Go here to find out more.