In April, the Trump administration proposed tariffs on up to $150 billion of Chinese goods. China has expressed that it will retaliate by placing $50 billion in tariffs on US planes, soybeans, and cars. With concerns about an upcoming U.S. and China trade war, here’s what you need to know.
The stakes of a possible U.S. and China trade war
Although the stakes are high, we firmly believe that the end result will be a stalemate and more business as usual. China has made its intentions clear with its China 2025 initiative, which aims to make China a global leader in many high tech industries (including semiconductors, robotics, industrials and agricultural machinery, aerospace equipment, high-speed rail, biomedicine and electric vehicles), all the meanwhile trying to achieve independence from foreign suppliers.
Will trade disputes wreck US investments?
This may make US investors feel uneasy, but at the moment earnings growth still looks strong and the global recovery still looks intact. Last year’s tax reform bill should benefit many companies and earnings growth is expected to be robust. Will trade disputes wreck the recovery? We don’t believe so. Both countries are walking a tight rope and must follow a delicate path. Our prediction is that China will open up on certain industries such as imported automobiles, but may not go as far as giving into demands related to easing restrictions on investments and intellectual property. This will make things challenging for companies that want to have access to the huge China market (roughly 430 million today to 780 million in the mid 2020s).
After the stock market drop, which began on January 23rd , the stock market was trading at a 16.4X forward earnings multiple as of March 31st , 2018. This brings U.S. stock valuations very close to their 25 year average, which was 16.1X forward earnings. Valuations don’t seem overly stretched at the moment and the strong economic numbers should still give the market room to breathe.
Areas we see value:
- Emerging Markets Equity
Areas we see risk
- Intermediate to Long Term Bonds
- Basic Materials
- Real Estate Investments
As of right now, we believe that an upcoming U.S. and China trade war is unlikely. However, if you are concerned and have questions about the impact this may make on your investments, please don’t hesitate to reach out and ask. At Chatterton and Associates, we are a team of registered investment advisors and we are happy to discuss potential changes to your investment strategy and putting your needs first. If you need help with your financial investments, contact us today to see how we can assist you.