On March 22nd, the Trump administration fired a salvo at China by signalling out nearly 1300 Chinese products for tariffs. The President signed an executive order slapping new tariffs on those items, to the tune of $50 billion. Some would say that salvo was a response (and not a first shot) to the decades long infringements that China has been making, undermining U.S trade policies. China of course responded by rolling out reciprocal traffic to the tune of $50 billion on American goods and services.
The trade tensions (I would hesitate to call it an outright war – at least not just yet!) has now escalated, with the U.S threatening to impose a further $100 billion in tariffs on China. And, as expected, China looks set to provide a response (some expect it to be reciprocal too) of their own shortly.
Such escalations in trade ties are usually considered bad – a “Lose Lose” proposition – not only for the two main protagonists, but also for those at the periphery. It is widely believed that, if a full-blown trade war does come to pass, there is likely to be broad-based collateral ripples felt in economies across the world. And there lies a potential opportunity for investors.
Global markets are already signalling weakness, based primarily in anticipation of escalating trade tensions between two of the largest economies in the world. All of the major indices have been on a rollercoaster ride – up one day, down the next. Experts believe that such volatility is a passing thing, and that these weaknesses are overblown, and therefore offer potential buying opportunities.
Emerging from the Shadows
To date, there has been relatively benign interest in emerging markets (EMs), largely as a result of growing optimism in the U.S economy – where new money has been thriving safely. However, if the trade-tension rhetoric inches towards a possible trade war, things might change significantly – and here’s why:
China could retaliate with significant tariffs on everything American – from soup and nuts to soy, pork and wine. You could also see energy, electronics and engineering goods and services come in the Chinese crosshairs. As a result, other global suppliers of some/all of these items could step in to fill the void left by the U.S.
So, who might those “other suppliers” be?
Well, Agricultural products from South/Latin America might be able to displace U.S agri-exports. Duties on electronics, tobacco and whiskey may make Korean and Japanese products more competitive. And more Russian oil and gas could replace US energy supplies to China. And countries like Thailand and Malaysia could step up to fill any potential demand for technology components, including chips and semiconductors.
One way to get your portfolios to emerge from the shadows, and leverage potential benefits from an Emerging Market resurgence, is through the SPDR S&P Emerging Markets Dividend ETF (EDIV). This yield-weighted index tracks a basket of high-dividend paying EM firms, and is pretty well-diversified, both from a sector as well as geographic standpoint.
Geographically, the top regions that EDIV invests in include South Africa (27.22%), Taiwan (19.22%), Thailand (16.85%), Hong Kong (13.52%), Malaysia (7.02%), Russian Federation (5.53%), Indonesia (4.01%), Singapore (1.09), Colombia (1.08%) and Poland (0.77%) – many/all of whom might benefit from rising trade tensions between the U.S. and China.
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In terms of sectorial diversity, EDIV has exposure to a cross-section of some of the largest companies in these regions, including Financials, Tech, Telco, Consumer cyclicals and non-cyclicals, Industrials, Utilities, Basic Materials and Healthcare.
While EDIV has seen some decline in its performance in the last month or two, it’s 6-month 12.72% gain handily beats the 2.26% yielded by the SPDR S&P 500 ETF (SPY), which invests in the broadest sectors of the U.S. stock market as represented by the entire S&P 500 index.
The author does not own any of the stocks mentioned in the article.