Mark Williams

‘Trade Wars’ volatility could throw up investment opportunities

Mark Williams

‘A highly regrettable and bad policy’ was the Reserve Bank of Australia governor Philip Lowe’s brief summary. While we share the sentiment regarding trade tariffs in general, we are not yet convinced that the current spat will escalate to a full-blown war.

This is important for the Liontrust Asia Income Fund, as we currently believe increased volatility is more likely to throw up investment opportunities than mark a period of weak investment returns.

This would definitely be true if announcements made so far were the end of matters, as tariffs of 25% on United States’ steel imports and 10% on aluminium do little damage to Asian exports. China may be responsible for more than half the world’s steel production, but combined exports of both steel and aluminium account for less than 1% of its GDP. It does not even feature in the top ten steel exporters to the US. South Korea would be impacted, as it is third in the list after Canada and Brazil, but the negatives should be manageable.

What is more important is whether the protectionist nature of America’s administration takes things further (which we expect it to) and how much so.

Earlier in the year tariffs were imposed on washing machines and solar panels, also of little consequence to Asia, but the process is unlikely to have run its course. An investigation by the US Trade Representative’s Office into China’s intellectual property practices is expected to announce a decision in the coming months, by August at the latest, which may give further fuel to the Trump administration’s protectionist fire. And given the retaliatory rhetoric already emerging from various continents, this is obviously a dangerous game to play.

These dangers were most recently illustrated in 2002 when Bush imposed tariffs on some steel products. This pushed up prices of steel, which was beneficial for domestic US producers, but squeezed those further down the supply chain, who employ far more than the steel industry itself. One study estimates that this brief spat led to the loss of 200,000 US jobs.

Trump will be aware of this but there is a high chance that he is more focused on November’s mid-term elections than the longer-term effects on the US economy. Building barriers to protect jobs from foreign threats may play well with voters, and we can expect more of such rallying cries over coming months.

This does not mean that things will be allowed to escalate too far. China with its massive manufacturing base is likely to remain a target, but it has a significant retaliatory arsenal which it has repeatedly said it will use if necessary. While the US’s exports to China are far less than its imports, America’s major sales could be replaced by similar products from other sources. China could easily buy its soybeans from Brazil, aeroplanes from Europe and cars from almost anywhere. When South Korea annoyed China by deploying a US defence system (Thaad) in 2017 the response was swift. Chinese tourists stopped coming and cosmetics and auto demand from mainland China dried up almost overnight. It seems unlikely that the US would want the same.

Conversely, what China sells to America is hard to replicate. Supply chains for electronics are long, making tariffs more likely to lead to inflation rather than alternative sources of production.

China has further advantages in that it is relatively well placed to navigate a trade spat. Exports to the US remains important but have dropped from over 7% GDP in 2006 to less than 4% now. If this tails off then it has plenty of levers to maintain growth domestically, including delaying reforms, rather than having to suffer.

All of these facts make it unlikely that the current skirmish will escalate to a full blown trade war. China may give some appeasing concessions – a stronger Renminbi against the US dollar, greater access to its financial markets, better protection for intellectual property rights perhaps – and we would welcome these. We hope it does not take retaliatory measures instead.

We will, however, have to monitor the situation very closely. As Gary Cohn, a strong advocate for free trade, has resigned from his positions as chief economic advisor, and may well be replaced by Peter Navarro, author of the book ‘Death by China’, the White House has lost a tempering influence. Risks to our base case have definitely increased.

For a comprehensive list of common financial words and terms, see our glossary here.


Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation.  The Fund invests primarily in Asian companies, which may be less liquid than companies in more developed markets.


This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.
Friday, March 9, 2018, 3:13 PM