17 Apr 2018
In the campaign trail, Donald Trump said many words about tariffs. President Trump has now decided on deeds – whether or not they might repeat the damage done by the Smoot-Hawley tariffs of 1930. Many academics argue that those tariffs contributed significantly to making the Great Depression as deep and durable as it was. Trump’s actions – and Brexit too – mean the issue of trade deficits is once again becoming a serious part of the political and economic environment in which investors find themselves.
Most economists stand by the Ricardo principles: if I am good at producing potatoes and you are good at producing carrots, we are both better off if we trade one for the other. The balance of that trade may affect the potato/carrot ratio over time (i.e. the exchange rate), but it shouldn’t get in the way of meals.
So markets are right to view President Trump’s recent announcements with concern. When someone upsets the delicate balance of agreements, that can escalate quickly into tit-for-tat. The EU’s proposed tariffs on Harley Davidsons, Bourbon whiskey and Levi jeans sounds more like retaliation on Jeremy Clarkson than Donald Trump, but the rise of the protectionist rhetoric is still disturbing.
That is not to say that current trade arrangements are immune from criticism. The Chinese government does tend to ask exporters to share intellectual property (IP) when they operate in China (though many, such as the Japanese automation companies we own, seem to be able to keep critical IP secret.) To the problems of tariffs and IP can be added dubious restrictions: the US, for example, has banned the import of haggis for 47 years. So, yes, the need for reform is obvious; but the opportunities for revenge are many when reform goes awry.
This also seems the wrong time for the current row. Chinese trade surpluses have shrunk significantly in recent years. Chinese domestic consumption has taken over from state investment as an engine of growth. This is a daft time to inhibit US exports to Chinese consumers. Germany is now the world’s main creditor and this is reflected in deficits in both the US and UK – a point Remainers seem not to have raised yet, but a potential drag on sterling in the future. Waiting for Germans to consume more is the financial equivalent of waiting for Godot.
Markets do not like uncertainty and they certainly seem to dislike recent events. That said, much of the fall has also been about Facebook’s issues, concerns about valuations and slightly lower business confidence, perhaps related to President Trump’s announcements.
On the other hand, large swathes of the stockmarket have little to do with international trade. In our portfolios, our themes of healthcare costs, tourism and retirees’ spending are little affected. Although demand for automation upgrades may be delayed, one of our holdings, Teradyne, sells small robots in the US and may benefit from imported Chinese robots being hit by a tariff.
Of course, most of this is politics, not business and certainly not sound economics. The mid-term elections are upon us and some Republicans will see fewer steel workers’ votes secured than soy bean workers’ votes lost. Meanwhile, well-managed businesses continue to prosper and, as their share prices fall, we may take opportunities to top up longer-term investments.
Simon Edelsten manages the Artemis Global Select Fund and Mid Wynd International Investment Trust alongside Alex Illingworth and Rosanna Burcheri. Visit the fund page or investment trust page for further information, performance and current positioning.
If you found this article interesting, we can alert you when similar articles are published; simply register for ‘My Artemis’ and follow the Artemis Global Select Fund and/or Simon, Alex and Rosanna.
THIS INFORMATION IS FOR PROFESSIONAL ADVISERS ONLY and should not be relied upon by retail investors.
The fund may have investments concentrated in a limited number of companies, industries or sectors. This can be more risky than holding a wider range of investments. The fund may invest in emerging markets, which can involve greater risk than investing in developed markets. In particular, more volatility (sharper rises and falls in unit/share prices) can be expected.
The historic yield reflects distribution payments declared by the fund over the previous year as a percentage of its mid-market unit/share price. It does not include any preliminary charge. Investors may be subject to tax on the distribution payments that they receive.
Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit artemisfunds.com/third-party-data.
Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.
Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.
Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.