Trade wars and international equities

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ksleo
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Trade wars and international equities

Post by ksleo » Fri Mar 23, 2018 5:06 pm

Lately I've been seeing more and more headlines about potential trade wars. So far, "trade war" seems to mean the imposition of tariffs, but I suppose things could escalate to the point that countries boycott each other's products.

Playing the devil's advocate, I can see three different and conflicting courses of action that might be recommended:

1. You should decrease your international equities and increase domestic because it's impossible to know how bad things might get. You also don't want additional currency risk in your portfolio during the already risky time of a trade war.

2. You should decrease your domestic equities to purchase more international. Since America only represents 25% of global GDP, you don't want to avoid the international markets that America might get shut out of. This will allow you to maintain more exposure to countries that aren't angry at each other.

3. Invest in everything at market weight and eventually it will all even out.

Personally, my equity allocation is in the Vanguard Total World Stock Index since I prefer to own domestic/international at market weight. As a result of this allocation, my portfolio has experienced less volatility over the past 1-2 weeks than if I had owned 100% domestic equities. Granted, 1-2 weeks is nothing in the grand scheme of things, but it's all I have to go on so far since I've never invested through a trade war.

I know the general advice on this topic will be to simply stay the course, and I already plan to do that. My question is: How do trade wars usually affect equities? Historically speaking, would it have been wiser to increase exposure to domestic or international equities immediately prior to a trade war?
Actions have consequences.

jebmke
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Re: Trade wars and international equities

Post by jebmke » Fri Mar 23, 2018 5:21 pm

Frankly, I don't think you can generalize from historical experience here since a lot has changed in the world. I don't think there is any way to predict the outcomes here. My strategy is to do nothing until I hit a re-balance point -- either equity/fixed or within equity, US/non-US.
When you discover that you are riding a dead horse, the best strategy is to dismount.

3funder
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Re: Trade wars and international equities

Post by 3funder » Fri Mar 23, 2018 5:25 pm

I'm keeping my 60/40 domestic/international equity allocation. Stay the course.

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SimpleGift
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Re: Trade wars and international equities

Post by SimpleGift » Fri Mar 23, 2018 5:33 pm

ksleo wrote:
Fri Mar 23, 2018 5:06 pm
I know the general advice on this topic will be to simply stay the course, and I already plan to do that. My question is: How do trade wars usually affect equities? Historically speaking, would it have been wiser to increase exposure to domestic or international equities immediately prior to a trade war?
My sense is that equity index investors can't completely escape the consequences of a trade war, either domestically or internationally. There are just too many unpredictable negative impacts upon world stock markets in general.

Since you're asking hypothetically (non-actionable), one way to reduce one's exposure to a global trade war would be an increased allocation to small cap stocks, both domestic and international. Since small caps receive a smaller percentage of foreign revenues than their large-cap brethren (chart below), they'd likely be more insulated from global trade impacts.
  • Image
    NOTE: Chart shows percentage of foreign revenue in MSCI regional indexes.
    Source: MSCI, as of 6/30/17.
Last edited by SimpleGift on Fri Mar 23, 2018 5:36 pm, edited 1 time in total.
Cordially, Todd

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whodidntante
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Re: Trade wars and international equities

Post by whodidntante » Fri Mar 23, 2018 5:35 pm

It might hurt export driven economies more, if they are targeted. Germany is chief among DM exporters, while China is chief among EM exporters. But you know what? Both of those countries have honest to goodness economies beyond making stuff to export and EM might import more than the west soon. Domestic demand growth in EM economies has been impressive.

It also might hurt import dependent economies more, chief among these is the USA in DM. I guess we'll have to see what tariffs and sanctions actually happen, and let the resulting economic calculus unfold. I don't know. It seems like everyone loses, at least in the broad economic sense.

ksleo
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Re: Trade wars and international equities

Post by ksleo » Fri Mar 23, 2018 5:55 pm

So far at least, this is my thinking:

In the event of a trade war it is better to own domestic and international at market weight. This is because global demand ought to remain mostly consistent. (Everyone always wants something, right?) Since global demand will hopefully remain consistent, people and businesses will have to get products/services from somewhere. However, the imposition of tariffs will cause them to seek those products/services from other companies and/or countries. Therefore, owning a world index will allow you to maintain access to all of global demand.

I realize a lot of factors affect these things, but that's what I've come up with for now.
Actions have consequences.

RRAAYY3
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Re: Trade wars and international equities

Post by RRAAYY3 » Fri Mar 23, 2018 5:56 pm

Nobody wins, everyone loses, and <nevermind I don’t want to get banned but you’ve all got to be sick of this insanity, right?>

livesoft
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Re: Trade wars and international equities

Post by livesoft » Fri Mar 23, 2018 5:58 pm

Take a look please at the one-day returns of international index funds versus the US index funds.

What do you see?

If you don't see that International funds did significantly better than US funds today, then you have a bias.
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RRAAYY3
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Re: Trade wars and international equities

Post by RRAAYY3 » Fri Mar 23, 2018 7:28 pm

livesoft wrote:
Fri Mar 23, 2018 5:58 pm
Take a look please at the one-day returns of international index funds versus the US index funds.

What do you see?

If you don't see that International funds did significantly better than US funds today, then you have a bias.
... 1 day tells the tale?

livesoft
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Re: Trade wars and international equities

Post by livesoft » Fri Mar 23, 2018 7:43 pm

RRAAYY3 wrote:
Fri Mar 23, 2018 7:28 pm
... 1 day tells the tale?
Yes, it tells the tale of today.
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RRAAYY3
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Re: Trade wars and international equities

Post by RRAAYY3 » Fri Mar 23, 2018 7:44 pm

livesoft wrote:
Fri Mar 23, 2018 7:43 pm
RRAAYY3 wrote:
Fri Mar 23, 2018 7:28 pm
... 1 day tells the tale?
Yes, it tells the tale of today.
so Int’l index > Total US because of one day?

carguyny
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Re: Trade wars and international equities

Post by carguyny » Fri Mar 23, 2018 7:59 pm

Surprising that no one has mentioned inflation as part of the thread, to me that's the number 1 impact of any tariffs is they increased inflationary pressures. It's just adding fuel to the fire - if they stick look for inflation to pickup more rapidly.

RRAAYY3
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Re: Trade wars and international equities

Post by RRAAYY3 » Fri Mar 23, 2018 8:01 pm

Washington does seem to pay attention to the markets ...

Maybe they’ll make changes once those gains continue dwindling away ...

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nisiprius
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Re: Trade wars and international equities

Post by nisiprius » Fri Mar 23, 2018 9:02 pm

I've long ago completely given up on this kind of thing because it involves a successful parlay of at least two predictions.

Prediction #1: There will be a trade war.
Prediction #2: If there is a trade war, then financial asset X will do Y.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

heyyou
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Re: Trade wars and international equities

Post by heyyou » Fri Mar 23, 2018 9:17 pm

Same here as Nisi, "It will fluctuate" was the answer to a similar question, about a century ago.
I know that I don't know, so there is nothing actionable about the situation. C'est la vie.

lazyday
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Re: Trade wars and international equities

Post by lazyday » Sat Mar 24, 2018 2:35 am

Could be a shock to the global economy causing slower growth and lower priced risk assets.

Everyone could get hurt, but maybe not equally. If everyone's in a trade war with the US but not with each other, then the US economy will likely suffer more than the average nation.

I'm not doing anything. Maybe if I were overweighting US equity, this risk would encourage me to think some more about market weighting equity globally, to reduce concentration risk.

Marketman
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Re: Trade wars and international equities

Post by Marketman » Sat Mar 24, 2018 11:10 am

I agree with the above thread, "Nobody wins, everyone looses." A global trade war will just hurt the world economy. US inflation will probably increase, everything else constant. If economic output decreased and inflation increases we would have stagflation. That is tough to prepare for. I say just stay globally diversified.

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Re: Trade wars and international equities

Post by LadyGeek » Sat Mar 24, 2018 5:08 pm

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