Trump’s tariffs: Is the worst over for markets?

Markets have been through another tough period in March following the war of words between US president Donald Trump and China, with a potential trade war already impacting sentiment and ramping up volatility.

Indices had already been rattled somewhat by concerns about the changing interest rate environment in the US, before Trump’s move to introduce tariffs on specific Chinese goods pushed markets sharply lower. As it stands, the decision by Trump – and the subsequent retaliation from China – has proved enough to send markets down significantly from peaks.

Looking across the board, the declines have been fairly consistent across major markets. The FTSE 100 and FTSE All-share saw peak to trough losses of around 12% and 11% respectively, while US and Japanese shares fell by similar amounts.

More positive signs have prevailed since the low point seen in mid-March but markets remain well below recent peaks and subject to hefty daily swings. So are there more headwinds for investors to come as this trade war heats up, or is now the time to take advantage of lower prices?

Adrian Lowcock, investment director at Architas, said whilst the tariffs announced so far remain fairly light, trade wars have a way of getting out of control quickly, especially given President Trump has shown he doesn’t like to back down.

“Trump has always stated he wanted to address what he sees as an unfair trade imbalance with China. As such, things could easily escalate before politicians sit-down to negotiate a truce.

“Markets have started to price in the potential impact of a trade war but there remains the risk of further sell-offs if things escalate.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, added: “Markets are cheaper than they were after what has been a fairly decent-sized correction, but investors must remember that this follows a very good 2017, so we are still up a long way.

“The truth is no one knows where this will end but we have seen some market falls precipitated by the escalation of the trade spat as investors opt for a risk-off trade.”

While the initial forays from both the US and China have spooked investors, Lowcock noted there were still a lot of positives for investors to focus on.

“Any sell-off is likely to create potential investment opportunities as global growth is still healthy, but investors should not try to predict the extent of any falls – after all, few (if any) actually know what action President Trump will take next. Investors should ensure they have some protection should things deteriorate, whilst being prepared to take advantage of the inevitable opportunities that market volatility will create.”

Looking longer term, Kim Catechis, head of global emerging markets at Legg Mason affiliate Martin Currie, said the current fallout from the trade war was creating potential opportunities to invest in specific markets at attractive levels.

“Trade and foreign policy tensions between China and the US are likely to intensify by mid-2018, but will likely stop short of an all-out trade war or severe conflict,” Catechis said.

“Whilst these headlines may have caused alarm among investors in emerging markets, in the longer term, these trade restrictions will likely only serve to accelerate the rapid growth of intra-regional trade among emerging markets, to the exclusion of the US. In our view, this will further shift the gravitational axis of world trade in emerging markets’ favour.”

Lowcock added diversifying investments more widely could be a useful strategy in the current environment. “Investors should be diversified across a range of asset classes from equities to bonds to real estate and commodities including gold, but also have investments which are exposed to different themes and strategies particularly in your equity investments,” he said.