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The impact of a possible trade war on your portfolio

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Over the past few weeks, tensions between the United States and its most important trade partners have flared up dramatically. On the stock market, the threat of higher American import tariffs also led to higher volatility. What will the KEYPRIVATE investment committee be paying extra attention to?

With the current fear that the statements of President Trump are only an omen of more significant measures, everyone is also looking at China. This country has been in the direct firing line of the Americans for some time because it exports much more to the United States than it imports from it. Because of this, many American companies are feeling sharp competition from Chinese firms (certainly in basic sectors, such as the steel production sector) and this is playing a major role in the growing escalation.

The seed has been sown...

Should a trade war erupt between the major economic blocs over the coming weeks, then the most important companies from the MSCI All Countries World Index (the barometer of the international stock markets) will face some risks. Many of these companies, after all, earn more than 50% of their turnover from international trade.

This does not mean, of course, that world trade has the same big impact on all companies in all countries. As we can see in graph 1, countries such as China and Japan are relatively less exposed to the international market. Whereas, we see that, for France and Germany, the exact opposite is true. The panic here does seem to be slightly premature, because French and German firms above all largely export to countries within the European Union.

Bron :

Perhaps it is especially the emerging countries which are still the most vulnerable? Graph 2 shows that the shares of the emerging countries perform better than the shares from the more developed countries (USA, Europe, Japan) whenever world trade is on the rise. The blue line in the same graph shows the additional returns of an investment in the emerging countries as compared to the West versus the annual growth of world trade (orange line).

In the situation of rising international trade, the emerging countries also did considerably better over the past two years than the stock markets in the West. In any case, we should observe caution and remain vigilant for a possible decline in world trade!

Bron :

All of these aspects combined mean that the heightened trade tensions form a key challenge for the investment committee of KEYPRIVATE. The emerging countries were assigned a large weighting in our portfolios during the past year. And, even though we still find the region very interesting because of the strong long-term fundamentals, the investment committee has still decided to increase the cash positions in the portfolios from 10% to 15% to address the short-term risks. If the situation remains serious, this cash position will be further increased in the coming months to cover the market risk.

This article does not contain any investment advice or recommendation, nor a financial analysis. Nothing in this article may be construed as information with a contractual value of any sort whatsoever. This article is intended for information only and does not constitute in any way a commercialization of financial products. Keytrade Bank cannot be held liable for any decision made based on the information contained in this article, nor for its use by third parties. Every investment entails risks such as a possible loss of capital. Before investing in financial instruments, please inform yourself properly and read carefully the document "Overview of the principal characteristics and risks of financial instruments" that you can find in the Document centre.

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