How should portfolio managers deal with a trade war?


By James Burton

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An explosive trade war could bring a recession closer but portfolio managers should be wary of overreacting, according to an industry insider.

Rob Edel, chief investment officer at Nicola Wealth Management, said an extended trade battle would quickly filter down into the economy, causing slower economic growth, higher inflation and interest rates, and lower consumption.

In that scenario, money managers would typically look towards the safer haven of fixed income but he said there is no reason to reposition your portfolio until clarity is provided over trade.

He said: “If we are just looking at equities and fixed income, even where valuations of equities are now, we don’t see that valuations are where you are going to see a lot of upside; it’s more earnings growth.

“The economy is still very strong and tax reform would more than offset what we are seeing with the tariffs, so you still have to be in risk assets here.

“We worry about what happens in the next recession and how quickly you get there but tax reform and other capital investment that should help with productivity could actually extend the cycle. A trade war would shrink the cycle, so it’s balancing that off.”

Edel said portfolio managers have to be aware of trade developments and even the effects of US President Donald Trump’s unpredictable tweets. However, he said that the various leanings of different media outlooks make it hard for investors to get to the facts but that, ultimately, Trump’s desire to get the trade deficit down by $100 billion is correct.

He said: “I saw a great quote in a New York Times article that said, just because Trump said it doesn’t mean it’s not true. He’s a wildcard and you get desensitized to it, and I also think the press doesn’t always give an unbiased report of what’s happening.

“For investors, what you are trying to do is get all the information, make a decision and weigh up the facts. I don’t think we’re getting all the facts – I think it’s somewhat skewed.”

Nicola Wealth Management has about $5 billion assets under management and Edel said that despite the uncertainty around trade, there are good things happening with the economy. He believes credit spreads and bond yields provide a better indication of where we are in the cycle but warned that investors need to stay alert.

He said: “We look at the general economy and we still think the backdrop is favourable for investors. A trade war, you can’t dismiss it, but I think both sides understand the risk. It’s like the North Korea situation too. There’s great benefit in reaching a satisfactory outcome for everyone and I think you have to be somewhat optimistic on that.

“If it doesn’t work out that way, I think we will move closer to a recession and the markets react accordingly. What we try to do is have a diversified portfolio that can cover off some of those risks. But I wouldn’t trade in front of this – I think that would be a mistake.”