Return of the trade war

Posted By Chris Smith  
21/05/2019
13:48 PM

This month we have seen both local and overseas markets continue to remain volatile. This has been caused largely by the recurrence of the US/China trade war. For a while, both countries seemed to be making progress with their negotiations however, this broke down after President Trump announced more tariff hikes on May 5. Essentially, President Trump is attempting to protect American jobs by making American manufactured products relatively more affordable, however this may impact the global economy. Since this latest trade war commotion we have seen US and global shares fall 4.5% and Australian Shares fall 1.7%.

Fortunately, the tariffs are not being imposed on allies of America including Australia. This means that we will not have to directly pay higher prices for our goods. Australia is an open economy which means that we rely on trade with other countries to survive economically. This also means that we can be indirectly impacted by economic events overseas, such as the US/China trade war. If the trade war is not quickly resolved, we should expect to see an overall decrease in global economic growth and hence a slow-down in local economic growth. We would also expect to see the Reserve Bank cut interest rates to help stimulate the economy if the country’s economic growth does slow down.

Another point worth mentioning is that inflation in Australia for the first quarter of 2019 was zero. Inflation is generally a good indicator of economic growth in the sense that when we see economic growth we also experience higher levels of inflation. Recording zero inflation for this period is an indicator the economic growth in Australia is potentially very low or not existent. This could be one of the early indicators of a recession in the not too distant future.

Next month, we expect markets to remain volatile as the uncertainty around the US/China trade war lingers, especially leading up to the G20 meeting in Tokyo in late June where we are negotiations will get back on track.

We encourage all our clients at AFA Group Wealth to remain resilient during these volatile times. These ups and downs are part of natural market cycles that we have been observing for over a hundred years and the investors who are able to remain cool, calm and collected always end up on top. As always, if you have any questions about how this may affect your investment portfolio, please do not hesitate to contact our office to organise a time to talk with your financial adviser.