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Which ASX Stocks Are Likely To Be Impacted By The Trade War?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

trade-war-share-market

Figure 1: The trade war has continued for longer than a year (Credit Greentech)

The rise of China will undoubtedly change the dynamic of international trade. An ever-growing percentage of the global economy is going to come from a country with a very different outlook to international trade and financial flows than the dominant western powers of today. US President Donald Trump has recently expressed negative sentiment about the possibility for a deal, declaring that planned September negotiations may not go ahead. He has accused China of currency manipulation, unfair trade practices, stealing US intellectual property and taking jobs.

Is there a parallel?

Robert Lighthizer, the U.S. Trade Representative managing American negotiations with China, was instrumental in winning a similar trade dispute with Japan in the 1980s. Looking at the way Lighthizer negotiated with Japan could give us valuable insights into how he will negotiate with China. Most of Trump’s accusations against China were also levelled on Japan, and, as their economic importance grew, the US pushed for Japan to open its economy. Lighthizer was instrumental in getting Japan to sign the Plaza accord, in addition to accepting tariffs and export restrictions to reduce the trade imbalance.

Unlike Japan, China’s one-party political system allows them to plan for the long term, a negotiating advantage Japan did not possess. China is also a much larger economy than Japan competing in a more globalised world, so there are more ways it can hurt the US consumer.

While it is clear China’s protectionism will be much harder to address, Chinese property developers have borrowed heavily in USD denominated debt, are vital to China’s economic development and are hard to bail out. These factors make it difficult for China to weaponize the yuan. Additionally, China needs to open international trade relationships to accelerate its expansion to a service-driven economy, and the Chinese people judge their government by its ability to deliver economic growth.

Is too early to call a clear winner, but Donald Trump and Robert Lighthizer are both very seasoned negotiators, which could improve America’s chances.

Which stocks will that effect?

A2 Milk (ASX: A2M) sold off earlier this year, as China ratcheted up regulations on the importation and advertising of foreign infant formula. A2 can no longer advertise infant formula in the 0-12-month-old market segment, and China is set to favour domestic producers which it wants to obtain a 60% market share. Tech/ fintech stocks such as Appen (ASX: APX)Altium (ASX: ALU)Afterpay (ASX: APT)WiseTech (ASX: WTC) and Xero (ASX: XRO) are more volatile than the market, and generally, sell off heavily in times of economic uncertainty.

If the trade war expands to other countries and products or leads to an economic slowdown, the big miners like BHP Billiton (ASX:BHP)Rio Tinto (ASX:RIO) and Fortescue Metals (ASX:FMG) could come under pressure. Blackmores (ASX:BKL) and Treasury Wine Estates (ASX:TWE) are heavily exposed to Chinese imports and will also lose out from broader protectionism and tariff rises.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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