Recent tariff actions by the U.S. and threats of retaliations have put the world at greater risk of a global trade war than at any time since the 1930s. While we don’t expect it to get that far, tit-for-tat tariffs among the world’s largest economies could take a toll on global supply chains, consumers and risk appetite, driving further market volatility. We see the potential implications for real assets falling in two groups:
For real estate and infrastructure, we believe minimal direct impact on fundamentals, combined with a calmer interest-rate environment, should support better relative performance versus many other equity strategies.
For commodities and natural resource equities, the market may react poorly in the short term to the prospect of slower global growth—but with both asset classes experiencing a longer-term bull market in fundamentals, we believe this could ultimately create a buying opportunity.
On July 12, 2018, the U.S. announced tariffs on an additional $200bn worth of Chinese goods at a 10% rate—this after China responded in kind to previous U.S. tariffs on $50bn worth of goods, which went into effect at the beginning of July. At a time when President Trump has been ratcheting up trade pressure on U.S. allies, markets are starting to react to the rising prospect of global escalation. Here are the potential outcomes we see:
- Resolution: Trade negotiations are successful over the next 6 months, limiting the potential damage to the tariffs already implemented—probability: low
- Bilateral escalation: The U.S. goes through with its threat to impose additional tariffs in September/October; China responds with proportional tariffs and other trade measures—probability: high
- Global trade war: Trade discussions with Europe and other allies unsuccessful, prompting a breakdown in a range of global trade agreements—probability: low but rising