As the trade war between the USA and China intensifies, and stock markets become increasingly volatile, investors are probably left confused over exactly which industries, sectors and companies may be most affected, and whether they stand to gain or lose from it.
To provide some background, the trade war started in January 2018 when President Trump approved global safeguard tariffs of $8.5 billion in imports of solar panels and $1.8 billion on washing machines. This led to the Chinese Government self-initiating anti-dumping and countervailing duty investigations on roughly $1 billion of US exports of sorghum in February 2018.
In the following months, USA and China ratcheted tensions up by declaring more tariffs on a wide range of goods, ranging from steel/aluminium to pork, fruits and nuts. By July, other countries such as Canada had joined in, imposing tariffs on USA products totalling $12.8 billion, and in August, USA announced higher rates on steel tariffs in Turkey.
Most recently, in September, President Trump approved a new batch of tariffs of 10% on annual imports worth over $200 billion, including electronics, raw materials, perfumes, mattresses and much more. In retaliation, China pursued new tariff actions against $60 worth of USA goods, ranging from meat to wheat and textiles.
From the above, there seems to be a gradual escalation in trade wars globally. While it will likely hurt all business, these behaviours may have more severe ramifications on certain industries
In this article, we look at three potential losers and three potential winners from the ongoing trade wars.
Trade War - Losers
The most obvious casualties of the trade war would be Chinese companies and businesses exporting majority of their products to the USA or trading frequently with them.
These include steel companies and companies dealing with white goods (refrigerators, washing machines and other types of home appliances) which will have to pay additional levies when exporting their goods. This represents an additional business cost that will directly impact their bottomlines . While it is possible to increase the prices of their products in line with the amount of levies imposed, this will only make them uncompetitive against business rivals from other countries which may not be subject to such levies.
Technology companies and companies selling discretionary or luxury products (such as electronic gadget companies, luxury bags, perfumes, shoes and watches) will also be losers in this trade war as the trickle-down effect from higher prices for steel products, white goods and consumer goods would crimp consumer sentiment, resulting in a lower propensity to spend.
With more businesses under pressure as a result of higher costs and lower competitiveness, they may start to lay off staff en mass and shut down plants and factories to reduce utilisation rates and allow supply to decline. These moves would ultimately impact workers as it means they may lose their jobs, suffer a pay cut or see delays in getting promotions and increments. With poorer job prospects and lesser disposable income, more people will tighten their wallets and spend less on discretionary items.
Banks may be another group of losers as the trade wars crimp spending by companies and curtail business expansion, leading to lower take up for loans. Higher levies represent a higher base cost for companies and this makes them less competitive. As a result, they may adjust their business practises and tweak their cost structures to remain competitive. Plans to increase production or spend more on capex may be put on hold as companies grapple with these challenges, and banks would see slower loan growth as companies tighten their belts and hoard more cash for a rainy day.
Furthermore, commodity companies (which tend to rely on significant amounts of borrowing) would have been impacted by the trade wars and face problems servicing their debt, leading to more provisions and write-downs by the banks on such loans. This may further affect the banks' profits and prospects.
Trade War - Winners
With both USA and China trading barbs and increasing their tit-for-tat measures, there are now fears that other countries would take sides and that this may escalate into some form of armed conflict. Therefore, security companies or companies which rely on defence technology spending, such as Lockheed Martin, Raytheon and Boeing would benefit from increased tensions between the two largest economies in the world.
Furniture and glove-makers from outside China would benefit as USA shifts more of its imports from countries such as Malaysia, Singapore and Thailand rather than China. The trade wars make Chinese companies less competitive and demand would shift towards ex-China companies. This will benefit non-Chinese companies which manufacture goods or provide services that fall under the tariff categories.
US Textile companies may likely be another winner as most manufacturing companies using textiles and yarns currently source their materials from China (from companies such as Shenzhou International for example). Domestic US textile companies would receive a boost in demand as their products would become relatively cheaper compared with China-imported textiles.
The trade war may bring about heightened volatility in the financial markets, but investors need to understand their risk tolerance and why they are investing in the first place.
You can’t say you’re a long-term or passive investor, but panic at the first sight of volatility. Similarly, you should not invest based on emotions or buy and sell investments because of rumours.
That’s not to say you should not make any changes to your portfolio after investing. You need to review your holdings and understand if the investments you have made have fundamentally deteriorated or are consistently underperforming benchmarks.