Essaye mentions South Korea could absorb any high tech engineering companies looking to relocate from China, but the iShares MSCI South Korea ETF (EWY) isn’t reflecting this possible shift in production, as it’s down 1% midyear.
He cautions advisors that these funds aren’t particularly liquid, and “if we see a global recession, all the emerging markets are going to get hit very hard. It doesn’t matter what’s happening to them individually.”
An indirect beneficiary from the U.S.-China trade war may be Russia, Essaye adds, as the fighting between the U.S. and China is causing the Asian nation to explore other economic alliances, with Russia being one. Russian ETFs, like the VanEck Vectors Russia ETF (RSX), are stronger this year, up 24% midyear, in part because crude oil prices were high until recently.
“China clearly has a vulnerability with us, given that they rely so much on us for their economy, and they’re looking to diversify away from that. Russia is a candidate for sure,” he said, adding that if oil prices continue to fall, Russian ETFs would likely drop too.
Complex Investment Issue
Mexico is a complex issue from an investment point. It should benefit from the U.S.-China trade war, Essaye notes, as part of the Trump administration’s beef with China is to ultimately return manufacturing production to the American continent. As of midyear, the main Mexico ETF, the iShares MSCI Mexico ETF (EWW), was up 8%; however, sources note there’s skittishness to invest in that country since the U.S. just brought immigration to the trade conflict with its southern neighbor.
Beacon’s Cook says companies thought the USMCA trade deal encouraged moving manufacturing to Mexico: “And then all of a sudden, we throw out the idea of tariffs for immigration purposes. These companies are having a very difficult time knowing where to go.”
Essaye suggests the ripple effect of Mexico’s immigration threat is likely limited to just that country, but it could pose a larger head wind to U.S. growth: “If I’m a small business, manufacturing something that comes out of Mexico, what’s my incentive to take on more risk for the next 18 months [until the next election]? Zero.”
Gold Takes New Shine
Another winner in the trade war skirmish is gold. The SDPR Gold Trust (GLD) hit five-year highs midyear on recent flight-to-safety moves. The slowing global growth, in part because of the U.S. tariffs, is opening another concern, Manning of Briefing.com notes, and global central banks are easing, including dovish talk from the Federal Reserve in June.
“We’re in uncharted territory, and it’s because of these monetary concerns, which is one reason I’m recommending buying gold,” he said.
Advisors’ focus now is on the trade war, but Manning says advisors need to consider alternative scenarios too. If Trump loses the 2020 election, and a moderate Democratic candidate like Joe Biden is elected, those tariffs are likely to be dropped. Or if there’s an unexpected deal with China, the stock market could rally further.
In that scenario, Manning said, “I would think that the transportation sector benefits. Something like an IYT [the iShares Transportation Average ETF] would fit the bill. It’s worth exploring what sorts of things could be most positively affected.”