Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Trade war fears spark another bout of market volatility
Donald Trump’s tariffs on steel and aluminium imported to the US, as well a threat to tax car imports from the European Union, have given investors something new to worry about.
The prospect of a trade war has triggered weakness in many stock markets around the world, particularly those like Europe and Japan whose economies are built on exports.
On a stock-specific basis, Rio Tinto (RIO) took a share price hit as it has considerable smelting operations in Canada and is a major supplier of aluminium to the US.
Shares in carmakers have been particularly weak including a decline in the value of General Motors and Toyota.
In contrast, assets considered to be lower risk have attracted investors’ attention since Trump’s trade war spat began on 1 March. For example, gold, the yen and German bonds have been in particular demand in recent days.
WHAT’S DRIVEN THE LATEST MARKET WOBBLE?
President Trump has outlined plans to impose a 25% tariff on US steel imports and 10% on aluminium, which would be bad for major suppliers Canada and the EU. He also threatened to apply a tax on cars supplied by the EU to the US.
Reports suggest EU trade chiefs are considering 25% tariffs on imports from the US such as Levi’s jeans, Harley-Davidson motorbikes and Bourbon whisky.
The US is the largest export market for EU cars and Germany is responsible for just over half of the EU’s car exports.
Trump’s tariff announcement effectively makes imports more expensive in the hope that US companies will switch to domestic supplies of goods. The tariffs could encourage affected industries in the US to increase production and use idle capacity, as well as creating more jobs.
However, that is a risky move as it could push up costs which ultimately get passed on to the consumer and cause rising inflation. This is relevant as fears over inflation were behind February’s global stock market sell-off.
WHAT DOES THIS MEAN FOR INVESTORS?
Markets are now concerned that the EU won’t be the only region to retaliate with their own tariffs on US goods. The worst case scenario would be reduced expectations for global economic growth which threatens to have a negative impact on investor sentiment and ultimately cause another ripple in the stock market.
No one knows if that situation is going to play out. For now, it is important that investors understand the forces that are moving markets. Some will ultimately turn out to just be ‘noise’ that goes away; others could be more serious.
At time of writing on 5 March, the S&P 500 had registered three straight days of declines in excess of 1%. Financial Times says is the first hat-trick of such daily losses for more than two years.
Investing is a long game and comes with both ups and downs. The best strategy is to keep feeding your ISA or SIPP (self-invested personal pension) on a monthly basis if you are comfortable with the associated risks. You buy fewer shares or fund units when prices are high and more when prices are low.
Drip feeding money ultimately means you aren’t trying to time the markets. That could potentially make you a calmer investor and not one spooked by certain events, although you should never ignore what’s happening in the world.