Will Bartleet, CIO and Portfolio Manager of Pacific Multi-Asset
The importance of being genuinely multi-asset in the face of global trade wars
It looked as though trade peace had broken out between the US and China. Now Trump’s latest salvo of new tariffs and ban on Chinese telecom giant Huawei threatens to usher in a long-term conflict over technology supremacy.
After imposing tariffs on $250 billion of Chinese exports in 2018, President Trump’s team reported constructive talks between the US and China and the promise of a grand signing ceremony between President Trump and President Xi. All that came to an end with a Tweet in early May when Donald Trump announced that the US would increase tariffs from 10% to 25% on $200 billion and threatened to put duties on all Chinese imports. With the new tariffs in place, the US has now twice the average tariff of most developed economies; the additional tariffs would double that again to levels “that are not far from the average level of duties the United States imposed with the Smoot-Hawley Tariff Act of 1930.” according to the Peterson Institute. The protectionist approach employed by the US in the 1930s is widely accepted as having exacerbated the Great Depression.
China’s response, up until recently, has been reasonably measured, raising duties on 2,493 different US exports to 25%. However, more recently their stance has hardened as the trade dispute has taken another more dangerous turn with the US’s ban on Huawei Technologies. Huawei is one of the world’s largest manufacturer of mobile handsets and a leader in 5G network technology. It has recently been described by Trump as “very dangerous” from a security and military standpoint. China sees this ban as a challenge to their aspirations to move up the value chain, as laid out in their Made in China 2025 strategic plan where they seek to be world leaders in areas such as IT, robotics, alternative energy and medical devices. These escalating disputes risk derailing the tentative signs of a global recovery and could push the world into recession.
In this uncertain environment we think that it’s very important for portfolios to be genuinely multi-asset and highly diversified across asset classes and not overly reliant upon equities which are vulnerable if the trade situation worsens. In the short term, at least, no economy will be a winner from a trade war between the two largest economies in the world, so our focus is on the cheaper equity markets, tilting away from the US where valuations are most stretched. We have a diverse allocation to fixed income securities which offer diversification benefits and attractive yields. We purchased a gold holding at the end of last year, which benefits from low real interest rates and hold diversifying assets whose returns tend to be uncorrelated to equity and bond markets. Finally, we have significant dry powder in both cash and short dated corporate bonds that is ready to be deployed if common sense prevails and a full scale trade war is avoided.
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