By Wasif Latif
Head of Global Multi-Assets
We may have seen the first casualty of a brewing trade war — the top White House economic advisor, Gary Cohn, said he’ll be quitting the post. Cohn fought hard against the tariffs on industrial metal imports that President Trump announced last week.
Cohn’s key reason for opposing the tariffs — 25% on steel and 10% on aluminum — is the same bedrock reason that many others cite: The U.S. economy could be at risk if other nations respond with tariffs or other protectionist measures of their own. Other large economies, including the European Union and China, are promising to retaliate against U.S. products — the EU’s tariff list includes U.S. motorcycles, blue jeans, orange juice, cranberries and peanut butter.
History tells us that trade wars tend to hurt all parties involved. That’s because punitive barriers to the global exchange of goods often create higher consumer prices, lower consumer demand and slower economic growth.
Corporations are benefiting from synchronized GDP growth across key developed and emerging markets — sales and earnings expectations for 2018 are up significantly from just a few months ago. This positive trend could be in jeopardy if trade tensions continue to escalate, and this could lead to more volatility in stock, bond and commodity markets.
The White House called out China by name in rationalizing the tariffs on industrial metals, even though China accounts for only 2% of U.S. steel imports and 6% of aluminum imports.
The bigger issue among trade hawks appears to be the overall U.S. trade deficit with China, which is huge and getting huger. But an across-the-board tariff on metals doesn’t seem to us the most effective economic tool because of the collateral damage — it stands to hurt other countries more than it would hurt China.
In our view, an all-out trade war is unlikely — for each trading nation, the inherent risks of going down that path are too great. But we don’t need that extreme scenario to trip up the economy — even targeted tariffs could be painful.
The United States is the world’s largest importing nation — that’s been the prime focus of those who support the tariffs. We also need to keep in mind that the U.S. is also the world’s second-largest exporting nation, so there are a lot of potential targets.
From a portfolio perspective, our asset allocation portfolios are currently underweight U.S. equities, as we see more attractive valuations and better earnings growth in non-U.S. markets, which we believe are earlier in the economic cycle. Any slowing in U.S. economic growth could make international developed and emerging market equities even more appealing.
As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are suited for you based upon your individual goals, objectives, risk tolerance and time horizon.
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