US-China trade war escalations could create another bear market.

Before COVID-19, the tensions between the US and China were rising. The two economic powerhouses are already fighting over the origins of the virus, a trade war would see the relationship sink further. Many experts say that China and the US are in a “new type of cold war”. Especially as the level of trust between the two countries is considered to be at their lowest point since they established diplomatic ties in 1979.

The supply chain and disassociation war

The world economy is already in ruins. A trade war will likely put the markets into a state of concerning fragility. America began by cutting off chip supplies to Huawei, which is the world’s 2nd largest smartphone maker. Also, the US is convincing its allies to digress from Huawei for the next generation of 5G network. Because of the suspicion that Huawei’s 5G might be used for spying. The US continues to look for ways to cut the Chinese strings by imposing strict export controls and limits on integrated supply chains.

It seems the American people are in unison with the government’s negative attitudes towards China. According to a survey conducted by FTI Consulting, 40% of 1,012 adults surveyed said that they would not buy products from China. This poll had a further interesting finding that 78% said that they would be willing to pay more for products if the company made them moved to manufacture out of China.

However, merely relocating to a different supply chain would not solve the problem. Over the last decade, China has positioned itself at the centre of global manufacturing and has equipped itself with internal supply chains. Meaning, China can select a nation to trade without of a pool of potential candidates.

Also, the US consumers moving away from China may cause damage as the US is China’s largest export consumer. However, China is no longer highly dependent on its export in terms of its GDP. The export share of its GDP fell from 37% in 2007 to less than 20% today. Thus the US moving away from Chinese goods may be offset by the domestic demand in China and increase exports in other parts of the world. In fact, China already sees this as an opportunity by providing medical supplies to companies hard-hit by the pandemic.

Impact on the market

It is clear to say that vaccine, treatment, and testing companies hold the stock market remote control. Just look at how Moderna’s  COVID-19 results triggered a bullish rally this week. It seems absurd that investors push the pandemic-economic fallout to the side and buys stocks. Mainly because of the injection of government stimulus.

However, investors won’t likely push the worrying trade war consequences aside. Just look at the bearish reaction to the last time the powerhouses were down each other’s throats. Meaning if the tensions intensify, the bears could claw down the gains in the past few weeks.

Thus, investors must watch the trade war with a close eye. Because deterioration in the US-China relationship could cause the bears to come out of the woodshed.

Stocks that are likely to suffer from US-China tensions include:

How should investors prepare their portfolio?

Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.

It would be crucial for investors to identify which industries are immune to US and China relations. For example, US Automobiles will seem to suffer if China increases tariff on US cars and disrupts the supply chain. Imposing a higher tax on supplies means that the US producers will have to pay more for parts in China. Ultimately, decreasing profitability if an alternative cannot be sought.

Many chip makers in the US had a high revenue exposure to China. As the US cuts its global chip supplies to China, chipmakers and electronic manufacturers are likely to suffer.

In light of the trade war, many investors gravitated towards gold. While gold is a great safe haven, that’s all the commodity equates to. Because gold’s intrinsic value is only what someone else is willing to pay for the shiny metal. Instead of slapping some gold on your portfolio, I would make sure my stocks can weather short term fear. (opinion not advice)

Lastly, do not let the US-China trade war fear infiltrate your mind. Because fear will cause you to panic and sell shares even if you take a loss (aversion loss). If you are a value or growth investors, then there is a high chance your stocks should survive the US-China trade war. (opinion not advice) Even if you see a short term loss on paper.

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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

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Written by Jaewon Jung, and Patrick McLoughlin Associate, and Senior Manager of YIG.