How trade wars affect your investments
The trade wars between the United States and China as well as other countries hit the news all the time, and they affect the economic outlook for Singapore as well. These policies can have an impact on your investments, so it’s important to follow what’s happening and position your portfolio well.
A “trade war” happens when countries place tariffs on each other’s imports, and the goods and services coming into the country.
The US announced that it is imposing tariffs ranging from 10 per cent to 25 per cent on goods from China, for instance, as well as similar tariffs on steel, aluminium, cars and other items from other countries. China and other affected countries then responded with their own tariffs.
These trade wars can affect businesses and consumers even here in Singapore, which has tried to stay out of the battle.
The tariffs, essentially taxes, increase the prices of goods or services that are imported in countries that charge tariffs. An iPhone or shirt or Mercedes car could cost 10 per cent more, for example, if there is a 10 per cent tariff on it.
Companies ranging from Apple and Caterpillar or Starbucks in the US to Daimler in Germany and Foxconn in Taiwan could see sales drop as tariffs increase the prices of goods they produce or import.
While the biggest impact is likely to be on businesses and consumers in countries that are directly affected, such as China and the US, the effects can spill over to other countries such as Singapore, too.
Small suppliers in Singapore and Malaysia or other countries may see sales or profits drop if Apple or Foxconn and other companies try to squeeze prices from suppliers or if sales of components they produce decline.
On the other hand, sales from these or other countries such as Vietnam and Thailand could increase if importers in the US look for goods from other places when tariffs cause prices of items from China to increase.
The tariffs could also cause inflation to increase in the affected countries, which may affect bond or share prices.
If prices of goods from China or Europe increase, consumers in the US may pay more and inflation may rise. Inflation could drop elsewhere, on the other hand, if goods such as steel or even iPhones are diverted to other countries at lower prices so that manufacturers can still maintain production levels and sales.
The US Federal Reserve Board may eventually need to change its current strategy of continuing interest rate increases, too, both because the economic outlook may change and because tariffs may have a bigger impact on inflation than the Fed expects.
These and other impacts of tariffs are clearly complex. That said, investors can still take action to protect their investments.
BUY INTO DOMESTIC CONSUMER-FOCUSED FIRMS
Given that companies with exports are likely to be affected the most by trade wars, experts suggest considering buying shares or bonds of domestic consumer-focused companies. Companies to look at in Singapore could include those dealing in property, restaurants and telecommunications, as well as consumer firms that focus on the local market.
Companies here that import goods could end up benefiting from tariffs. If tariffs on phones or solar panels produced in China cause an increase in prices and a decrease in sales in the US, for example, Chinese companies could lower their prices in Singapore in order to keep up their sales volumes.
Trade wars have also affected exchange rates in seemingly unaffected countries such as Indonesia, where worries about trade have led the rupiah to drop to record lows.
Firms that import commodities from countries where the currency has dropped could benefit from lower costs due to foreign exchange rates that drop during the trade wars.
Companies in Singapore and Vietnam or other South-east Asian markets that export to the US may also benefit because they can sell goods more cheaply than their Chinese competitors.
Since the US is not imposing a tariff on all countries, US importers that find goods from China too expensive could switch their procurement sources to producers in South-east Asia.
Investors can take these potential impacts into account by selecting stocks or bonds that have benefits or little effect from the trade wars, or by looking for exchange-traded funds (ETFs) or index funds that have less impact from trade wars.
It may be also preferable to avoid buying shares or bonds in companies that may be hurt by trade wars, such as semiconductor firms here or globally, that may see reduced demand for their products. Stocks of Chinese exporters or firms in the US such as clothing or technology companies which sell goods produced in China could also be hurt by tariffs.
Investors who buy unit trusts or ETFs may wish to consider rebalancing their portfolio if they have invested in China or other countries affected by trade wars.
While it is difficult to anticipate and account for all of the effects of tariffs and trade wars, considering stocks or bonds in sectors or countries that are less affected can be beneficial. Investors with a diversified portfolio who select sectors and companies effectively can do well despite trade wars.
