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June 26, 2018

How to Prepare for Trade Wars?

Trade tensions are here to stay. We see economic fundamentals running strong and underpinning our risk-on view in the short term, but acknowledge the potential impact of escalating trade frictions on business confidence–and economic growth. It’s critical to build resilience in portfolios as macro uncertainty rises, we believe.

The U.S.-China economic tensions have risen significantly, as our BlackRock Geopolitical Risk Indicator shows. This has coincided with a rise in the performance of quality stocks relative to the broader market (green line). Investors appear to be heeding risks, trade included. Trade risks are not limited to China. The prospects of a North American Free Trade Agreement (NAFTA) deal have deteriorated. The European Union (EU) and others have retaliated against U.S. steel and aluminum tariffs, while the U.S. has threatened to impose tariffs on cars imported from the EU.

Tech rivalry is key

Prolonged tit-for-tat actions could affect the economy through two channels: First is the impact on confidence, which could lead companies to delay investment and spending. Second is the direct impact of tariffs as they push up costs and depress demand. The breadth and depth of global supply chains will amplify this impact. China-U.S. tensions run deep, with the U.S. trade deficit as the headline issue. Ultimately, a full-blown trade war is in neither party’s interest. A limited agreement to reduce the U.S. trade deficit with China looks feasible. Yet we see rivalry in the technology sector as a more fundamental issue that could lead to enduring tensions.

China is unlikely to compromise on its key strategic goals in developing its high-tech manufacturing sector. A key event to watch: The U.S. government is expected to announce restrictions on inbound investments from China on June 30. These restrictions could affect the Chinese supply chain and harm the ability of its “national champion” companies to import critical technology–mostly from the U.S. What may lie ahead?

We highlight three key signposts

  1. Will there be deal discussions between senior officials of the two countries?
  2. How much pressure to retreat will the White House get from Republican legislators and U.S. firms?
  3. To what extent will U.S. companies in China be pressured by local authorities?

The answers to these questions may provide some guidance as to whether the next move is toward a deal or more bouts of tit-for-tat. Yet some form of investment restriction is likely to come first.

We see solid fundamentals still underpinning global growth in the short term, but acknowledge that geopolitical risks such as trade tensions are amplifying macro uncertainty. Portfolio resilience is crucial now. We prefer up-in-quality exposures in fixed income, favoring investment grade debt.  We also like hard-currency emerging market debt while avoiding highly leveraged assets. We like companies with strong balance sheets and earnings growth in equities, mostly in the U.S. Diversification and broad style factor exposures can also help buffer portfolios against potential market regime changes.
Courtesy of Richard Turnill, BlackRock Chief Investment Strategist annd a regular contributor to The BlackRock Blog (more by BlackRock here)
Investing involves risks, including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. ©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.   532873 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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