Australia may not be directly engaging in the current trade war between the United States and China, but with two of our largest trading partners at odds, there will inevitably be consequences.
The latest stouch began in early August, when a fresh round of US tariff announcements on Chinese imports saw China move to devalue its currency and ban US agricultural imports. China’s currency has now weakened to the lowest point in a decade.
Portfolio Manager for the Trilogy Enhanced Income Fund, Henry Elgood says that global consumers are an early winner. The cost of many goods may go down and possibly become cheaper to buy with foreign currencies.
“Global consumers will find Chinese exports becoming much more attractive, especially compared to the US.”
When it comes to global trade, Henry says that investors will be attracted to the export sector.
“The net position for anyone buying Chinese exports from overseas is either neutral or even better off than before due to a lower cost of exporting goods. For Australian investors, it does create an opportunity for goods coming out of China becoming much more attractive, internationally.”
A trade war between the two powerhouse economies is creating some concern in markets. Confidence and investor sentiment is likely to dip in the short term in global markets, particularly in some South-East Asian markets competing with China in manufacturing, such as Vietnam.
“In the short term, what could affect Australia is China’s demand for our iron ore. If that demand falls off, then the price and demand will continue to soften both domestically and internationally.”
“Once positive sentiment returns to markets, you’ll see a pickup in domestic production within Australia, driven by the pickup in demand from China in terms of our resource exports.”
Henry believes it’s too early to tell when this sentiment will pick up again in global markets, but when it does, Australia “has a runway.”
“On a daily basis we are seeing signs of sentiment rising, with a pickup in many types of domestic investment instruments. At the same time, if there’s a new tariff that comes out, or a devaluation of the yuan, or a drop in global sentiment, you will see a bit of volatility in terms of day-to-day movements.”
“Short term volatility is also being seen in bond markets and bank swap rates moving in line with political announcements.”
This means that investors need to have patience. Henry urges that a long-term vision could be key for many investors, in order to ride out any short-term volatility.
“While there has been a drop in sentiment, and there is a risk of off approach to some degree, it does also present opportunities to make sure that you reassess your portfolio and make sure that those longer term underpinnings are sound,” Henry says.
“You’re seeing the possibility of buying opportunities opening up, particularly with bond markets moving around. We’ve seen ample opportunities to allocate more and diversify across different exposures within the Trilogy Enhanced Income Fund investment portfolio.
“Whether you have a growth focus, or an income focus, it could be time to ensure that you’re positioning your portfolio in such a way that you can achieve your desired outcome in the market.”
For more market insights, read more on our discussion about Australian interest rates and if they’re likely to go negative or lean more about what falling bond yields could mean for investors.
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