The trade war between the US and China is showing no signs of cooling down anytime soon but rather than shunning the region, analysts at IG Group said the US could be the safest place for investors to put their capital.
Recently, Donald Trump announced a further $200bn worth of tariffs following China’s retaliation to previous tariffs imposed by the US, which had already shaken global markets this year.
Additionally, with US stock valuations near record highs despite slipping back at the start of the year, investors have been shunning the market.
Performance of S&P 500 year-to-date
Source: FE Analytics
However, if the egotistical war of words were to escalate into a full-blown trade war, chief market analyst Chris Beauchamp and market analyst Joshua Mahoney said the US itself, in particular small-caps, would be a safe haven from the trade war.
Mahoney said: “It’s about who is most able to weather the storm, and when we’re talking about who can get hit the most by the trade war the US has more room to breathe. The likes of the [European Union] EU and China I don’t think necessarily have much.”
He said that the US exports around $230bn worth of goods to China, so China putting $50bn tariffs on those goods is possible.
However, China will not be able to keep pace with the latest further $200bn of tariffs imposed by the US, he said, because there aren’t $200bn worth of goods for China to impose tariffs on.
“We haven’t heard anything from China saying they’re going to do another $200bn worth of tariffs because quite frankly, there’s not another $200bn to apply tariffs onto,” said Mahoney.
“Certainly, and this is what Donald Trump is thinking, it comes to a point where this imbalance is going to show through where the US can do more and the Chinese can’t.”
However, he did say that China can hit back in other ways. For example, if Trump wants to do 10 per cent on $200bn, then maybe China will do 25 per cent on $100bn.
Europe has also been dragged into the trade war as Trump looks to further cement his protectionist policies putting tariffs on steel and aluminium with car makers being targeted next.
Mahoney said that although the US has the upper hand, people in China and the European Union are going to look towards their leaders to be strong, not to roll over and allow the US to worsen their terms of trade.
Historically, however, Europe has tended to come off worse from trade wars, according to chief market analyst Beauchamp.
He believes the same could happen in this instance and added that emerging markets are another region that will be hit by a trade war.
“Trade wars are bound to make themselves felt I think fundamentally more in emerging markets than developed markets, which should almost be seen, especially the US, as your safe haven in this case.”
On the US, he said: “We’ve seen a constant steady uptick in earnings over the past few years, which reinforces the sense that this is, remains, and will continue to be, an earnings-driven bull market.
“And that reinforces my sense of, if you were to try and find that safe haven for investors away from tariff wars, then US markets should at least hold their ground, probably outperforming their cousins in Europe and Japan.”
More specifically, Beauchamp believes small- and micro-caps are set to benefit the most from the trade war.
Indeed, they have already benefitted thus far and produced superior returns to mid- and large-caps in the past three months.
Russell Microcap is up 13.59 per cent and Russell 2000 is up 11.13 per cent, while Russell 1000 is up 6.11 per cent and S&P 500 is up 5.97 per cent.
Performance of US indices over three months
Source: FE Analytics
He said: “You look at the Russell 2000, admittedly a very small segment of the US market, but again people are thinking: ‘If we are going into a period of trade wars, if we are seeing an end or at least a pause to this period of synchronised global growth, where is your safe haven?
“And the small-caps, the domestically-focused stocks in the US, perhaps even in Europe as well, are where you can get away from the nagging concerns of trade wars. That will be where you start to see your improvement.”
He added other safe havens from the trade war could be found in the utilities sector. Admitting they were the boring choice, Beauchamp said that perhaps they were hit prematurely by the fears over the US 10-year Treasury yield continuing to rise above 3 per cent.
But this hasn’t happened and so income stocks will remain popular, he said.
In general, however, the chief market analyst said he isn’t overly worried about the trade war.
He said: “The thing that so many people are asking, and I think this is a fair question, is [whether] this is the thing that derails this great economic expansion.
“Is that, coupled with the tightening posture from the Fed, the one thing that will put a stop to this great improvement in earnings in stock market valuations?”
“Obviously, we don’t know the answer, but at the moment the data is not giving us cause for concern and that’s a reassuring outlook from this point in time.”
Mahoney added that the he believes the outcome of this trade war will be good for everyone.
“I think what we’re going to end up having on the other side is actually a greater availability of goods at cheaper prices. I think free trade is going to be something that will come out of this.”