Trade wars and your portfolio – 3 measures

December 5, 2018 - John Osbon (3 mins to read)

War is a big word and usually cause for concern among investors. I’ll limit this article to the financial aspects of a war because this war I am talking about is overwhelmingly financial. When the word war is mentioned many older people think of the Cold War. The Cold War was much more than financial and ended decades ago. Now the phrase Trade War is in the air. How can you tell the effect on your portfolio of a Trade War?

First measure – how will I see the effect

The trade war is a global tax among all countries on trade. Sometimes the words tariff, surcharge, sanction and embargo are used but they are all escalating versions of the same thing: a tax that must be paid among countries that trade.  Until several years ago trade wars were virtually non-existent because a free trade/no war environment was considered good for everyone and good for investment portfolios. Since Trump was elected that has changed. “I am a Tariff Man” he has said on Twitter and he has followed through in a random fashion. You will barely see the effect of a trade war in your portfolio because it is a hidden tax, and a small one. Everyone pays it so no investor gets any advantage.

Second measure – how big is big

Since a trade war is a tax there must be some way to measure it. There is. For investors the tax will show as reduced profits by companies in your portfolio.  For US investors the measurement is blunt and effective. Although you may not like Trump he is right that the Chinese have much more to lose in a trade war than we do. Trump and Xi –  leaders of major trading countries – have declared a trade truce from December 1st to March 1st. The truce consists of a standstill on a 10% tariff, holding off on the 25% tariff.  Both tariffs are large and have an economic effect on both countries. But they are not material because both economies are so large. For example, let’s assume a 10% tariff reduces per share profits for US companies by about 5% and a 25% tariff reduces profits by 10%. Profits per share for the S&P 500 are expected to be $170  in 2019 and that’s including a 5% decrease . Not all 500 companies are affected by trade.  Even if the estimate factors in an actual tariff of about 10% in 2019 due to the truce, we are still at reasonable valuations for US stocks. No bubble in sight.

Third measure – when will I see the effect

The effect has already occurred and your portfolio has been affected. On the upside your portfolio’s total value has peaked twice this year (January and September) and troughed twice this year (February and November). If you have a diversified portfolio you will have some winners like paper producers, financials and media and some losers like soybean growers and car makers. Even with a trade war all other signs point to growth: employment, the economy, and even domestic spending.

War, what is it good for?

Absolutely nothing in the words of Edwin Starr. No one wants war, especially political leaders.  Instead I expect we will experience trade uncertainty for some time. Uncertainty delays investments by companies so there is some drag associated with uncertainty. But the uncertainty drag effect on a portfolio is far less than a war effect like the Cold War. The Cold War contained the possibility of annihilation. Slightly lower profits is something we can all live with for some time. Some say a trade war can start a recession but there is no sign of recession anywhere in the world.  If you would like to have detailed discussion about trade and your portfolio please call us. We’ll be happy to show you a custom analysis of trade and your portfolio.

IPO alert: by Friday noon local Cambridge biotech company Moderna Therapeutics MRNA will establish a public value. I estimate the first trade will indicate a market value of $12 billion. Move over Silicon Valley, Boston is here.



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