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LGT Beacon: The "trade war" favors a counter-cyclical trading approach

July 17, 2018

The escalating trade disputes could – eventually – result in more open global markets, at least among strategically allied nations with similar interests. In the meantime, however, the U.S. approach to strong-arm its trade partners into making big concessions is likely to keep disrupting markets. We thus remain inclined to trim equities during rallies.

Amid escalating international trade tensions, U.S. equity indices eked out a third monthly gain in June, while most other markets retreated. More recently, equities have started to regain upward momentum and rebound globally, as China has decided not to formally respond in kind against the latest set of U.S. tariff threats for now.

Against this background, we note the following: 

  • The so-called trade war is not over and liable to keep disrupting markets going forward
  • The disputes between the U.S. and China are of a strategic nature and thus very difficult to be resolved quickly; the tensions are liable to spilling over to other areas where long-term interest collide
  • Most major democracies are long-standing treaty allies of the U.S. and largely share the latter’s core concerns vis-à-vis China – that means they have a higher motivation to compromise and reach agreement
  • However, U.S. President Donald Trump’s methods and style complicate the negotiating process among allies and can lead to divisions and political backlashes within the camp
  • The successive introduction of import tariffs by the U.S. and the retaliatory measures by other major economies will gradually creep into business supply chains, eat into profit margins and spill over to consumers, potentially hurting demand further down the road
  • Lastly, the current equity market rebound is driven in large part by the anticipation of another strong corporate earnings season, as well as signs of an accelerating U.S. economy, driven by a generous fiscal stimulus

Counter-cyclical trading approach

In short, the U.S. administration’s aggressive posture has increased uncertainty over policy and the outlook, which is clearly weighing on stock markets. Equity markets should normally be trading significantly higher in an economic environment as good as the current one. 

Furthermore, the upcoming earnings season may distract from the trade war and thus offer an opportunity to trim equity exposure, particularly in the markets that are likely to be most negatively impacted by policy uncertainty and potential changes in the global trade regime.

We therefore remain inclined to use periods of strong stock markets gains to trim our equity position and raise cash in order to be better prepared to rebuild positions when the opportunity arises. We are upholding this countercyclical approach while maintaining our constructive but defensively-biased broader asset allocation.

Read more in the LGT Beacon

Read about the resulting investment positioning changes in our portfolios in the LGT Beacon below. To subscribe to a weekly newsletter, go to subscriptions.

Note: The next edition of the LGT Beacon is scheduled for mid August 2018.