ACCUMULATING WEALTH

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A few Thoughts on Trade War

Since the beginning of May, the market sentiment has turned bearish, owing to the intensified trade dispute. The situation was perceived as the worst when Trump launched a full attack on Huawei. Obviously, the so-called trade war is no longer what it sounds like, but a technology war and the battle to be the World Number One.

The funny thing is, despite all the dramas, the US stock market fell less than 5% since the US Commercial Department banned Huawei and 70 of its affiliates to buy parts and components from US companies. This was even so after a series of events developed subsequently, within the duration of two weeks.

This is called divergent. It means when the worst has happened and people expected the market would react very badly afterwards, but it did not. It implies that the market has factored in the worst scenario. As a result, the smart money buys into the weakness on negative news. At the time of writing, the Dow Jones Industrial (DJI) Average stood at above 26000, which is higher than 25863, the day US announced sanction against Huawei on 16th May 2019. Am I saying the worst is over with the trade war? Of course not! When everyone expects the market to collapse, it normally won’t. From here, there are a few interesting observations we can make from this trade issue:

1)  The so-called trade war started almost a year ago, and even though the progress has been dramatic, the stock market has gradually adapted and adjusted to it, despite no one could predict how and when it would end.

2) One of the possibilities is that the global trade dynamics would shift from the world’s two largest economies to South East Asia (SEA), such as Vietnam and Malaysia, among others. In fact, the shift has started happening. For example, companies in China outsource to Malaysian companies and export their products through Malaysia. Likewise, US companies would order from Malaysia rather than from China.

3)  As a result, more opportunities are coming to South East Asia. Regardless of how the trade issue progresses, international companies would reassess their risks before making any investment to China. I am not saying this is good, as the global economy will feel the pain if trade dispute continues. But over the long term, the world would tend not to over rely on the US and China for consuming and manufacturing activities.

What to do amid uncertainty?

Before we discuss it, let us have a look at our portfolio on 14th June 2019.

Disclaimer:
The companies or strategies mentioned in this article are meant for study purpose only. It doesn’t constitute any ‘buy’ or ‘sell’ recommendation. Please consult your financial professional if you want to make any decision.

The portfolio above has showed a gain of 213% since November 2015. We stayed put ahead of the G20 meeting, as there is little optimism that Xi and Trump would reach a positive outcome then.

With such uncertain scenario, it depends on whether you are doing trading or investing. If you are a trader, make sure you have a trading plan, such as your entry price, loss cutting point and profit target. You’d need to have all these parameters pre-set in mind before making any trade, because your capital will only be in the market for a short term. Whereas for investing, you may consider investing in companies:

  1. Where their products have an on-going global demand. Despite a short term pull back due to market volatility; their orders will still come back because the world requires their products in the long run.
  2. Which are not affected much by the trade war, such as business with local monopoly advantage, like Takaful and Ptrans and more.
  3. Which are the beneficiaries of the trade war, such as KGB, VS, PIE, Wegmans, to name a few.

Alternatively, you may hold more cash, especially if you are uncertain. With the trade dispute prolonging, it is likely you would have opportunity to buy on dip. Anyway, whether you are doing trading or investing, it is important to hold some cash, so that you can grab the opportunity when it comes.

Conclusion

Last but not least, volatility is part of the game. Whether you are doing trading or investing, it is important to have a plan, such as your desired price and profit target. Most importantly, knowing your risk appetite and manage it accordingly. With that, you would increase the chance of winning.