In the post-war period, free trade became something of a sacred cow for
economists. Few challenged its benefits, and almost all supported the
unhindered movement of goods and services across national borders.
In practice, global trade doesn’t always happen in a frictionless fashion.
But the so-called “comparative advantages” of each nation (where countries
focus on their industry specialties and lower opportunity costs) supports
the theory that international trading partners are best served without
Yet this decades-old orthodoxy has now come under siege. Since taking
office in early 2017, the Trump administration exited the Trans-Pacific
Partnership, demanded NAFTA revisions, and announced tariffs on numerous
imports. The resignation in March of Trump’s top economic adviser, Gary
Cohn, dealt a big blow to free-trade proponents inside the White House.
Now, with the U.S. singling out China, the threat of a trade war between
the world’s two largest economies has unnerved investors.
Although the economic impact of recently proposed trade actions is actually
quite small, the main danger is that the rules may now be rewritten, with
the world moving away from an era of liberal trade and open markets.
Full-blown protectionist policies in the U.S. would undoubtedly prompt
retaliation from other nations and convince the world that the global
trading system is unravelling. Such a shift would mark the largest and most
dangerous change in economic thought and order in decades.
However, it is imperative to delineate aggressive rhetoric from real
underlying motives and intentions. While Trump has stated that trade wars
are “good and easy to win,” the reality is that America has worked hard to
shape the global trading system, and U.S. multinationals have benefitted
immensely. While Trump’s base may cheer “America first” policy-making, such
actions are largely to their detriment.
Rising import prices will disproportionately hurt lower-income households,
while jobs are unlikely to return to the hollowed-out U.S. manufacturing
sector. Free trade has been a staple of the GOP platform with past
Republican presidents including Reagan and both Bushes embracing
globalization. This ideology remains intact as Cohn’s resignation drew
condemnation from at least half the GOP caucus in Congress.
Accordingly, we believe Trump’s bark will be worse than his bite. Trade
threats will likely continue but are more likely aimed at drawing
concessions from trading partners than instigating an all-out trade war.
While the recent global equity selloff may present selected buying
opportunities, we prefer to maintain a balanced asset-mix approach while
closely monitoring developments between the U.S. and global trading
From a regional perspective, our preference for equities in Europe and Asia
has been further strengthened. In today’s highly interconnected world, we
believe the perceived instigator of trade tensions will ultimately be the
“biggest loser.” Further nationalistic actions from the U.S. would likely
strain domestic households, erode US multinational companies’ earnings, and
encourage trade partners to diversify their export bases. If the U.S.
withdraws as a global country leader, expect other leaderships (namely
China) to fill the hegemonic void.
What to do
It is during times of volatile markets that the role of disciplined
portfolio management is most appreciated. Rather than feign flawless
clairvoyance, the portfolio manager is mandated to anticipate probable
risks, prepare for opportunities and, most importantly, not to lose
perspective when everyone else has lost their head. Either behavioral
extreme – fear or complacent high expectations – are to be restrained
through research and perspective. Emotions repeatedly prove themselves to
be short on reason and lead to wrong conclusions. Why?
More often than not, large declines from a previous market high tend to
lead to capitulation. Invariably, that leads to a strong rebound.
Navigating these dynamics requires a disciplined framework that can extract
emotion from the decision-making process. A such, Forstrong’s investment
team will not waver in its approach – no matter the intensity of investor
Looking ahead, the best possible defense against market volatility
continues to be wide global diversification with an orientation to the
longer-running macro themes playing out in the world economy (for example,
the rise of the Asian consumer, demographic trends, urbanization, etc.).
Our global ETF portfolios have already been positioned for shifting trends
and regimes with an ultimate goal of avoiding the “big mistakes” and
continuously adapting in an era of new realities.
We believe that remains the best way to secure your financial futures.
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in Forstrong’s
Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at firstname.lastname@example.org. Follow
Tyler on Twitter at @TylerMordy
Notes and Disclaimers
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investment, financial, legal, accounting or tax advice.