So, what’s behind the turmoil? How serious is the threat? And what could it mean for Australian consumers?
The big worry for many investors is Trump’s move to impose tariffs: taxes on imports into the US. Tariffs are a key plank of Trump’s pitch to “Make America Great Again”: he is betting they can reinvigorate US manufacturing against competition from overseas. Most economists, however, believe tariffs lead to higher prices and slower growth, which risks spreading as many US trade partners retaliate by slapping their own tariffs on US goods.
Importantly, the recent market slump is following a period of stellar gains in the US, which had stretched valuations – which makes share prices vulnerable to sudden adjustment if there’s some sort of negative shock.
“The US has experienced two years of 20 per cent plus returns. The chances of having another strong year were very low,” says chief investment officer at $139 billion fund UniSuper, John Pearce.
Pearce concedes there could be “short-term pain” from the tariff uncertainty and says there are also longer-term risks to US companies if Trump “starts taking America inwards”.
‘We’re not panicking’
Even so, he adds that the global economy is in reasonable shape and says the fund has been growing more positive on investments in other markets such as Europe and Japan.
“We are not panicking; we are looking at deploying cash at the moment,” he says.
Perpetual head of investment strategy Matt Sherwood also emphasises US sharemarket valuations were “extremely expensive” before the recent slump, and he remains wary about leaping back into the US market at current levels. “Investors have to be really cautious about bottom fishing and being impatient and leaping before they look,” Sherwood says.
Due to the high share price valuations, Sherwood argues it could be a difficult period for investors and says he prefers markets such as Europe, the UK or Japan. “I think there are opportunities which are pretty attractively priced. They are not in Australia or the US in the benchmark,” he says.
Wall Street’s benchmark index entered a correction this week as fears over Donald Trump’s trade war escalated.Credit: Bloomberg
As well as super giants such as UniSuper eyeing off European shares, high-net-worth investors have also been showing greater interest in the region, says Andrew McAuley, chief of investments for wealth management at UBS.
European shares are up 6 per cent so far this year, compared with a 6 per cent slump for the S&P 500.
A standout performer in Europe has been the defence sector, as investors look to profit from an expected build-up in military spending on the continent – as Trump has also pushed for. There has also been robust demand for Australian corporate bonds and gold, he notes.
Most mum and dad investors probably aren’t buying European defence stocks, however, so the impact of Trump’s trade war is likely to be indirect for most people.
“For the person on the street, it’s the impact on global trade and the impact on China in particular, and what it does to demand for our exports,” McAuley says.
For now, sharemarket volatility is the clearest sign of local fallout from Trump’s trade war, and investors appear likely to remain on edge for as long as the current uncertainty prevails.
So far, the impact of Trump’s tariffs on Australian exports appears relatively small, though it could well rise. Economists were quick to point out this week that the aluminium and steel exports to the US were worth only about $1 billion – a tiny fraction of our exports iron ore exports to China, for example.
AMP’s economist Shane Oliver says even if Trump slaps tariffs on all Australian exports to the US, it will affect exports worth close to the value of those that were caught up in Chinese restrictions in 2020.“In the great scheme of things, our exports to the US are not that great,” he says.
Aside from people who work in industries affected directly by tariffs, the big risk for the wider economy be if the trade war escalated and sparked a global recession – though Oliver adds we’re a long way from that, and he’s hopeful it will be avoided.
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Otherwise, the key impact for many Australians may come through their superannuation fund, most of which have significant US investments. The typical super fund lost 0.8 per cent last month, SuperRatings reported, as trade wars unsettled global markets. Even so, this was only the second month of negative returns this financial year.
If the share slump goes further, there’s a risk it could dent consumer confidence via so-called “wealth effects” – the idea people change their spending because they feel poorer. But there’s little evidence this has occurred yet – indeed, consumer sentiment improved last month.
For now, sharemarket volatility is the clearest sign of local fallout from Trump’s trade war, and investors appear likely to remain on edge for as long as the current uncertainty prevails.
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