Investors have been warned over the risks to the global economy from increasing protectionism after the US government announced, but at the time of writing had not yet imposed, tariffs on $34 billion of Chinese goods, with a threat to extend it to $400 billion of Chinese inventory.
Aviva Investors said it was moving from overweight to neutral on emerging markets, due to the risks of protectionist policies. Aviva’s senior economist and strategist, Michael Grady, said recent moves have increased market risk and reduced expectations for equity returns, particularly for stocks with trade and US dollar sensitivity. Grady added: “While we must not dismiss the risk of rising tension over trade – President Trump’s ‘America First’ policy could be a disruptive factor for the next two years – we view these developments as volatility events that can to be weathered as long as they do not derail the global recovery. We would not be surprised to see more frequent spikes in volatility, or mini-crashes, however, as central bank support slowly wanes and markets are forced to re-learn how to price underlying risk.”
In its latest asset allocation views, Aviva said it was moving to overweight in US equities and going from underweight to neutral in UK equities, due to higher oil prices and a fall in sterling improving earnings prospects.
Index and data provider MSCI has also looked at the investment implications of a US-China trade war. It said that a trade war would slow the global economy and push up short-term inflation, whether it was limited to the US and China, or spread more widely. It added: “In Europe, there has been less in the way of direct impact but the expectation is that some of the main sectors (eg automotive manufacturers) are likely to suffer, given President Trump’s focus on protecting the US car industry and rustbelt region and the openness of the European economy to knock-on effects from the US-China tensions.”