Investors’ nerves tested by US-China trade tension

Retail investors received an unwelcome surprise this week when the re-emergence of trade tensions between the US and China sent global markets tumbling, threatening the strong bull run in equities since the start of the year.

US president Donald Trump’s tweeted threat last weekend to raise tariffs on all Chinese imports by 25 per cent disturbed the calm conditions global markets have been experiencing since December’s volatility. US and Chinese equity indices slid from Monday onwards amid fears of tit-for-tat trade sanctions, while European shares were drawn more deeply into the sell-off by Thursday.

The declines reflected investors reversing their optimism about the likelihood of an imminent resolution of the trade dispute between the US and China.

Tom Stevenson, investment director at Fidelity, said: “Expectations had become high that we were likely to see a deal signed by the end of the week. [They] evaporated on the back of the tweet from Donald Trump.”

The sell-off in equities was accompanied by rising demand for safe haven assets, such as US Treasury bonds, gold and the Japanese yen.

Interactive Investor, the UK’s second-largest fund supermarket, said that retail investors were holding on to gold. This week, average daily investor sales of gold and precious metal exchange traded commodities fell to their lowest level so far this year.

Despite increased caution, the market turmoil has not deterred DIY investors from buying US stocks. Interactive Investor said its usual buy-to-sell ratio of 60:40 for US trades had prevailed this week.

Adrian Lowcock, head of personal investing at Willis Owen, a fund broker, said that investors were right to hold their nerve rather than be rattled by the short-term trade tensions. “Investing is long term and whilst it is hard to ignore short-term macro events, trying to predict them and profit from them consistently is almost impossible,” he said.

With trade negotiations between China and the US ongoing, some analysts brushed off Mr Trump’s threats as posturing ahead of an eventual resolution. Rupert Thompson, head of research at wealth manager Kingswood, stressed that it was still in the best interests of both countries to reach a deal. “While the risks have certainly risen, on balance we still expect [a deal] to be reached — even if not in time to prevent a temporary hiking of tariffs on Friday.”

Mr Thompson added that investors should not be discouraged by falls in equity markets given the strong rally in the first few four months of the year. “The 2 per cent drop in global equities from their high has to be seen in the context of the 15 per cent gain seen year-to-date prior to Trump’s tweets,” he said.

The US Federal Reserve’s surprise decision in January to put interest rate rises on hold was one of the main factors contributing to the strong recovery this year. But Russ Mould, investment research director at fund supermarket AJ Bell, said that markets had been “lulled into a false sense of security” by the Fed’s move.

Mr Mould added that this week’s rout was “a wake-up for markets” given the prevailing risks for the global economy, including trade. “When you’ve seen things go up in a straight line for five months, some pause for thought is no bad thing,” he said.

Ben Seager-Scott, chief investment strategist at Tilney, the wealth manager, said that protectionist policies from populist governments such as the US remained a threat. The intensification of Mr Trump’s rhetoric has sparked fears that the US president may turn his focus to other targets, such as Europe. Tilney has decreased exposure to Europe in its portfolios, fearing that “the trade war might start moving towards Europe at a time when it is not best placed to deal with it”, Mr Seager-Scott added.

Some investors may view the equity market falls as an opportunity. US markets previously fell 20 per cent in response to the original trade war, but subsequently recovered their losses, causing investors who bought the dip to do very well, said Rebecca O’Keeffe, head of investment at Interactive Investor.

She added: “Investors who believe this spat is likely to be shortlived may be tempted to buy in on current weakness, but the question is whether the risk reward is genuinely attractive, given where prices are now and what happened last time around.”

However, investors who do not want to run this risk could consider adding downside protection to their portfolios to mitigate the impact of future volatility. Experts advise increasing exposure to defensive stocks or sectors that are less vulnerable to global trade, such as domestic equities. This presents a difficult choice for British investors, as domestic-facing stocks have been hardest hit by the ongoing Brexit uncertainty.

Other experts stress that uncertain times should remind investors of the need to hold a broadly diversified portfolio. Multi-asset funds are one way of doing so; spreading an investment across shares, bonds and other asset classes such as commodities and property.

Mr Lowcock suggests nervous investors could consider swapping some of their equity exposure for absolute return funds, which are designed not to lose as much as equity funds during market routs, at the cost of not performing so strongly in the good times. He suggests the Newton Real Return as a good candidate for a fund that could weather all market scenarios.

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