US President Donald Trump has initiated a trade war with China. What are the implications for our investments?
Tariffs
Trump is fighting the trade war by imposing tariffs on products imported to the United States from China. These tariffs make imported products less appealing as they increase the price American consumers pay. Trump is also threatening to ban US companies from supplying technology to Chinese companies like Huawei.
Protectionist Societies
Trump’s argument focuses on the idea that protectionist societies create more and higher paid jobs for local people because they import less from low-cost producers like China. Of course, local production means the products will cost more than Chinese imports.
Globalisation
The argument for a globalised society is the opposite. Free market supporters argue that you build wealth by having cheaper products from global supply chains.
Both protectionism and globalisation can work in the long term. But both also cause pain for the societies affected. As investors, we don’t judge which ideology is right or wrong. We have to prepare for scenarios that could unfold.
There are at least two ways the trade war can progress.
OPTION 1: No negotiated deal.
OPTION 2: There is a negotiated deal
OPTION 1: No negotiated deal
While companies restructure their manufacturing and supply channels there will be reduced revenue for these companies and there will likely be significant market declines.
As companies become organised, revenues will return over the long-term. Employment will increase, especially for low-skilled work, and standards of livings would rise over the long-term.
OPTION 2: There is a negotiated deal
The stock market will boom if a deal is signed. This will be mostly a relief rally, in that companies do not have to reorganise their manufacturing and supply channels. Over the long-term, the US will have to work out how to re-skill its workforce to deal with globalisation.
The Trade War does not affect the demand for the brands we choose to invest in, it does, however, affect the supply of these brands in the short term. We will continue to analyse these businesses to assess how their cash flows are affected. Consumers from around the world will continue to desire great brands. Consumer behaviour will remain regardless of trade wars.
At AXIAM, we buy shares in companies that pay regular, increasing dividends, because they own great brands that are known, loved and used around the world daily and we keep them for a long time. Sign up for our newsletter, or contact our fund management team to invest.