investment viewpoints

Trade wars: is the US shooting itself in the foot?

Trade wars: is the US shooting itself in the foot?
Didier Rabattu - Head of Equities

Didier Rabattu

Head of Equities

As the two largest global economies square off, we believe this could disrupt global growth and the boom cycle in the US. A lasting war of attrition could lead to higher inflation, lower economic growth, lower returns on equity, and a higher risk premium due to political tension.

We believe this combination could be negative, especially when it comes at the top of a long economic cycle and a very long bull market, both of which have lasted around nine years. There has not been too much damage so far and the implications are still limited, but the momentum looks fairly negative.


Three probable outcomes

In the event of a fully-fledged trade war, we see three probable outcomes. We believe inflation could accelerate as free competition between countries and companies would be eroded. Investors and corporates would also likely reduce their capital expenditure in the face of greater uncertainty, meaning we could see a slowdown in economic growth. Finally, the risk premium could rise significantly if investors start to think the situation is not under control.


Impact on emerging markets

However, emerging markets may not be as impacted as many people seem to expect as most have strengthened their domestic economies. The reality is that this is happening 10 years after the great financial crisis, when imbalances between emerging markets and developed markets were far more pronounced. Emerging markets, and especially China, were huge exporters of goods at a time when developed markets, with the exception of Germany, were massive importers. The situation has changed and the imbalances have been corrected over the past decade as Asia in particular has meaningfully increased its domestic share of GDP. 

Countries with thriving technology sectors, such as Taiwan and Korea, are more at risk as they remain susceptible to any slowdown in export demand, and are tightly linked to the global cycle of capital expenditure. On the other hand, we believe India would feel little impact as its dependency on the external world is limited. China finds itself right in the middle. 

As long as the US and China do not get too carried away with the prospect of tariffs, we believe the impact should be fairly limited. However, the determination of the US to impose tariffs seems to be matched only by China’s determination to impose retaliatory measures. The US may find itself on the losing end of this endeavour.

important information.

For professional investor use only.
This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
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