It should go without saying that free trade devoid of protectionism is a truly great thing for the world’s productivity, and hence for the companies listed on our stock markets. In fact, a free trade agreement almost always benefits all parties in the long run, as it results in the more efficient use of capital as individual economies move further towards what they do best.
The trouble is, we keep getting sabre-rattling politicians who are clueless about economics and who think imposing trade barriers will actually help improve their countries’ wealth. It’s populist ‘blame the foreigners’ rhetoric, and it’s nonsense.
President Trump’s new tariffs on steel and aluminium are already resulting in retaliation, and the net result is more likely to be detrimental to America’s jobs market than beneficial as exports face extra pain.
And they’ll surely impact on the performance of our companies too. So what should we do, as investors, to protect ourselves?
The market is always right
Well, the first thing, as with almost every economic hurdle that comes along, is don’t panic! Margaret Thatcher, in one of her few utterances with which I fully agreed, famously said that if you try to buck the market, the market will buck you. And in the long-term, any new trade barriers will surely fall again as those imposing them are likely to suffer the most.
The markets will still be there and doing what they do best, long after Donald Trump’s economic policies have faded like the bad dreams they seem.
In fact, more than just not panicking, I say we should welcome such uncertain times, as uncertainty is anathema to institutional investors who are far too keenly focused on just this year’s, or even just the next quarter’s, performance.
Many of them will be less bullish, and short-term demand for stocks could well fall as the folks relying on portfolio-risk-balancing software go off and do mad things like buying more bonds, and even perhaps pointless shiny metals. And that could provide long-term private investors with better stock buying opportunities.
Which FTSE 100 stocks could become better bargains?
Some stocks to watch
Miners would seem like one obvious target, though ironically they’re often seen as defensive stocks for tough times. Rio Tinto, for example, produces a lot of iron and aluminium, but not in the US. In particular, Rio satisfies around a third of US aluminium demand. And though it has gained an exemption from US tariffs for imports of the ubiquitous metal from Canada, chief executive Jean-Sébastien Jacques has already voiced fears of Rio suffering in the event of an escalating trade war.
Rio’s share price is buoyant at the moment, but that could change.
Could BHP Billiton face similar problems? The company’s iron ore production all comes from outside of the US, from Brazil and Australia, two countries which don’t have the kind of arrangement enjoyed by Canada.
Should trade battles intensify, I can see the oil sector possibly being hit too. Although there’s no hint of tariffs on oil (which gas-guzzling America would probably find hard to swallow), any slowdown in international trade could well hit oil demand. And any reversal of oil’s recent price strength would not be good for oil shares.
If you invest in US stocks, manufacturers of global consumer brands could be hit by retaliatory tariffs — “Don’t want our steel? Well, we don’t want your Nike and your Starbucks.“
And given the global nature of engineering, aerospace and defence companies could eventually be hit too. Rolls-Royce does a fair bit of business in the US, and tariffs could harm its slow recovery. And BAE Systems gets an even bigger slice of its business from America.
Time to fill up?
For me, these are not companies to avoid, but ones to keep an eye on in case their shares do fall in the coming months. And then I think they could become better bargains for when the trade war inevitably subsides — remember what markets do to those who try to buck them?
Generally though, we should be rubbing our hands in keen anticipation of picking up some bargains that could help speed us to an even earlier retirement.