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Portfolio Showing China Fatigue? Invest in Facts, Not News

Posted on Monday, July 1st, 2019 by Chris Markoch

Since the beginning of 2018, one of the major stories moving the markets is the United States trade war with China. However, most of this movement is due to the uncertainty that the trade war, and its resulting tensions, create.

What is less clear…the actual consequence of the tariffs? The problem for investors is that you need to invest in facts, not news. For example, the market rose sharply after the news that officials in both the United States and Chinese governments agreed to continue trade talks, after face-to-face negotiations between U.S. President Donald Trump and Chinese President Xi Jinping.

There was no announcement of a deal. There was no timeline for a deal. There was an agreement between the leaders to keep talking about a deal. Or maybe it was an agreement to keep talking about talking. Who knows?

And that’s the point. Many investors just want the story to go away. But it may not, at least for a little while. This is why you have to take steps to protect your portfolio from China fatigue.

The definition of investor panic

If economists are correct, the tariffs the U.S. has imposed tariffs on Chinese imports total $200 billion annually. The announcement in May that the administration planned to increase those tariffs from 10% to 25% would mean that the U.S. would increase their revenue – which is the extra cost that China, and consumers, will pay - by $30 billion a year. However, back in May, the announcement of the possibility of a tariff hike was greeted by a sell-off that, by some estimates, cost the market $700 billion in value.

Let’s restate that in a different way. If the tariffs are left in place (and that’s unlikely) it will bring in $30 billion a year to the federal government’s coffers. However, over the span of a few days, investors just took 20 years of potential tariffs out of the market. That’s what trading on the news can lead to.

The truth about tariffs

A tariff is a cost that will affect both the United States and Chinese economies. This is because a tariff increases the cost of importing goods from one country to another.

As a consumer, I suppose you can get concerned about the rising costs of iPhones, appliances, and televisions. These tariffs on $200 billion in imports from China will mean that the average U.S. household will pay an extra $831 for goods and services according to the Federal Reserve Bank of New York. Undoubtedly, American consumers will pay more for goods that require the raw materials that we receive from China.

Many Americans are also concerned about the cost to American soybean farmers as the trade war has meant the United States is exporting less of our agricultural products to China. And when you consider the Chinese threat to close the market for a select class of metals, called rare earths, which are essential to the U.S. technology industry, there are reasons to pay attention to the news.

And don’t forget there is another side to this dispute – the widening trade deficit between the two countries. The ultimate goal of the Trump administration is to increase exports to China.

But what is the real impact?

Any tariff is really a tax increase. In this case, a tax paid to the federal government by China. Each and every month that the tariffs stay in place, China pays the United States this revenue – as mentioned above – in current terms that would amount to about $30 billion a year.

But in a $20.5 trillion economy, $30 billion doesn’t buy what it used to. As an investor, these tariffs simply are not going to have a significant impact on economic growth in a positive or negative way. The facts don’t bear that out.

Follow the money to find the winners and losers

The fact is, in every trade war, there are always industries and asset classes that stand to benefit. For guidance, investors need to follow the money. In this case, Wall Street has been taking a more defensive posture and moving money into sectors like health care and consumer staples. At the same time, they are moving out of sectors with the most exposure to the trade dispute such as technology, industrials, and energy.

This is not the first trade war and won’t be the last

Due to the size of the economies involved, the current trade war with China will continue to dominate the news. And the intent of this article is not to dismiss potential national security concerns. But if investors take their emotions out of it, the reality of the situation is very clear. Both sides have plenty to gain from a new trade agreement. A deal, at some point, is a near certainty.

 But the goal of every investor is to figure out how to make money in any market. From that perspective, it’s important to remember that this is not the first time that investors have had to balance their investing strategy to adjust to trade relations between the two countries. And it won’t be the last.

The key for investors is to figure out what sectors are likely to be winners and which are likely to be losers. For long-term investors, it may be as simple as just keep doing what you’re doing. The market is surging on just the announcement that the two sides are agreeing to talk. If there was an actual deal, you can imagine what the market will do.



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