“Now is the time for investors to ensure that their portfolios are properly diversified.” Those are the words of Nigel Greene, the founder and CEO of deVere Group. DeVere is arguing that investors need to use portfolio diversification to make sure their wealth is protected against the possible market volatility that lies ahead as the Trump administration ramps up its rhetoric about a brewing trade war with China.

Donald Trump has called time on a number of Chinese practices that have been irritating US businesses, including the theft and forced licensing of proprietary technology from US firms doing business in China, and protecting the Chinese market from US businesses in violation of China’s commitments under its World Trade Organisation membership.

China’s central bank is moving to free up funds ahead of an escalating trade war which is beginning to focus the attention of traders. On the other side of the Pacific, the Trump administration is understood to be preparing plans to limit Chinese investment in US companies, likely to mirror restrictions on foreign investment already in place in China.

“China’s central bank reducing its reserve requirements for banks is significant,” says Tom Elliot, international investment strategist with deVere. “Is it just to add pressure on the US, by looking like they won’t back down and are preparing the economy for the worst? Or do they actually think no agreement to avert trade wars will be reached and that this is necessary?”

By relaxing bank reserve requirements the Chinese central bank will allow its domestic banks to lend more money, traditionally something they might do if they thought the economy was about to weaken. The Chinese government will be keen to make sure there is no obvious link between this and the trade war with the US, as face is important in China, and the Communist Party does not want its citizens to think it is losing a trade war.

The Chinese economy has been a critical engine for global economic growth and stability since the Great Financial Crisis in 2008. The Chinese government also owns a mountain of US public debt. Its own growth has been partly fueled by its ability to export freely to America. The coming trade war, if it goes ahead, will have major implications for the global economy, with the potential to re-shape it in radical new ways, the likes of which we have not seen since the energy crisis in the 1970s. It will be testing for asset managers and investors, the bulk of whom will have got used to the current financial infrastructure.

What to expect from a US-China trade dispute

We don’t expect this to be good news for either the Chinese or US economies. We’d expect to see losses sustained by major benchmarks of US economic health, like US stocks or the S&P 500. We could also see some sell off in the USD, but bear in mind that the Federal Reserve is likely to raise rates again this year.

Investors could diversify out of US stocks into safe haven assets like pharmaceutical companies and important utility firms. Other beneficiaries will be gold and the Swiss franc. It may also be worth looking at longer term real assets plays like listed private equity or real estate funds, although avoid exposure to the already over-priced UK property market.

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27th June 2018
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