Client Login

Trade wars and your portfolio – 3 measures3 min read

Dec 5, 2018 - John Osbon ( 5 mins to read)

John Osbon

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.

WEEKLY INSIGHTS
delivered to your inbox

DISCLAIMER

This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.