Johann Jooste, Chief Investment Officer, Bank of Singapore, Member of OCBC Wealth Panel

On the edge of a trade war?
The shots of a global trade skirmish were fired on 15 June as US President Donald Trump announced a 25 per cent levy on US$50 billion of imports from China.

The tariffs focus on “industrially significant technology,” and intend to hurt China for alleged theft of intellectual property rights. China responded within hours with a detailed list of imports from the US valued at US$50 billion that it would impose a similar 25 per cent tax on.

The latest skirmish has Chinese authorities targeting US farm products, automobiles and energy. Food, beverage and feed are a major US export category and soybeans, the top product in this category, is being targeted.

In response, Trump raised the stakes and threated a 10 per cent tariff on an additional US$200bn of import tariffs on Chinese goods.

Brace for more trade risk from now till 6 July 2018
This US$200bn tariff plan is extremely aggressive and could represents another “shock and awe” tactic to force China into making as many concessions as possible, before the first tranche of tariffs is scheduled to be implemented on 6 July 2018.

There is still a two-week window for further bilateral negotiations. But time is short.

Based on Trump’s hard bargaining tactics, even if there is a trade truce on 6 July, this US-China trade rivalry is not over.

The dispute seems to be about national security as much as trade, which means that US-China tensions will be around for the foreseeable future.

The situation has to get worse, in terms of pain for the US (markets/economy), before it prompts a change of course for the Trump administration.

Currently, the risk of a trade war is becoming much higher at this stage. In particular, the risk of misjudgement on both sides is plausible.

Yet with NAFTA deadlines looming and tariffs due to come into effect on 6 July, the room for a quick turnaround looks limited. So even if the worst does not happen, uncertainty could well continue through the coming months.

Difficult to predict tit-for-a-tat trade skirmish
First round of tariffs confined: So far, the direct macro impact of the first set of tariffs on China and the US is limited. Calculating the damage from tariffs is difficult. Simply noting that US$50bn is only 0.3 per cent of the US economy probably understates the losses, due to the potential disruption to global production networks.

Next round more impactful: Even the US$50bn of Chinese goods hit by tariffs is relatively small in terms of an equivalent tax increase, but if we get both another US$200bn of Chinese goods and Autos then suddenly the hit will be significant.

Then of course there is the impact on confidence and supply chains.

Collateral damage to other economies in the global supply chain (especially Northern Asian economies) could not be ignored.

Portfolio actions to tide through rising trade risk
Adopt cautious asset allocation stance for now: There is a need to manage risk from an investment strategy perspective.

Investors should be nimble to adjust positions should the situation deteriorates.

We have in recent weeks reduced risk in our asset allocation – holding more cash and reducing equity risk in the process.

Depending on how the trade situation develops, we should remain nimble and adjust portfolio positioning accordingly.

Add some portfolio hedges from now till 6 July: Investors cannot ignore such a threat even if it does not seem like a baseline outcome. A diversified portfolio is the first line of defence, but those investors who match the risk profile can consider adding addition portfolio protection that could buffer against such risks.

Should there be a sudden shift back away from trade confrontation (which seemed to happen as recently as a few weeks ago in US/China negotiations) risk assets would bounce sharply. This is why we have largely chosen to put on temporary hedges rather than take our long positions off.

Avoid the stocks exposed to the frontlines: Based on the first round of tariffs, investors should avoid sectors such as US agriculture, US autos, chipmakers and semiconductors.

China is the world’s largest market for automobile producers. Automobile exporters will face not only the impact of reduced Chinese demand for US cars if the tariffs go into effect, but would also have to pay more for imported steel on account of the new levies to be imposed on purchases from Canada, Mexico and the European Union.

Seek shelter in domestic-orientated companies: There are some merits to look at companies with a lower foreign exposure. The hit to large listed multinational firms will be greater than to the economy overall, as it is the large multinational that dominates global trade. There is a need to evaluate exposure to trade risk from a company-by-company perspective.