Global giants inevitably will try to seize control of critical parts of the economy to their advantage. What does this mean for nations like Indonesia, Australia and the Philippines caught between the U.S. and China? Weisman wonders if they will be forced to favor one economic giant over the other. That type of process could quickly become expensive, and multinational profit margins could get squeezed.
It is the cost issue that concerns some of the most experienced global investors. Tariffs and other trade frictions ultimately raise unit costs, which in turn leads to higher prices, says Loomis Sayles vice chairman Dan Fuss. The net result is that markets shrink.
How it all plays out is anyone’s guess. Centralizing supply with a single nation may create efficiencies but it also engenders dependencies—Apple probably regrets locating so much production in China.
Near-shoring, as evidenced by U.S. manufacturers moving suppliers from Asia to Mexico, can lower costs and increase profits and production speed. But other issues come into play. America, for example, has been shortening its supply chain for energy with the advent of horizontal drilling, while China has negotiated deals for minerals in faraway Africa and soybeans in faraway Brazil.
On the surface, it would appear that President Trump is correct in assuming America has inherent advantages when challenging other powerhouses in international trade. After all, global exports represented only 9% of U.S. GDP in 2019, according to Commonwealth Financial Network chief investment officer Brad McMillan. Contrast that with the fact that exports represent 14% of Japan’s GDP, 16% of the eurozone’s and 19% of China’s.
America benefits from a large, insulated, almost guaranteed market, a labor force that is still growing—unlike the rest of the developed world—and easy access to capital, McMillan notes. But one doesn’t have to be an Iowa farmer or a Michigan automotive executive to see the U.S. is still dependent on trade.
For investors, the paramount issue is what this all means for asset prices. Studies of the Cold War era indicate that PE multiples from 1960 to 1989 were 4 or 5 points, or 20% to 25%, lower than they are today. Inflation and interest rates, of course, were much higher in the 1970s and 1980s.
American multinationals that dominate the S&P 500 have been among the biggest beneficiaries of globalization, and markets have rewarded them with rich PE multiples. Over the last decade, they have also attracted yield-hungry investors looking for juicy dividends. So far, many of these companies, with the exception of industrial and technology concerns, have displayed only minor vulnerability to trade disruptions.
That could change. Most signs of trade friction in America are surfacing only at the micro level—Maine lobster exports to China are down 70% over the last two years while Canada’s lobster exports have doubled.
However, China’s economy is slowing noticeably. Michael Cuggino, CEO and chief investment officer of Permanent Portfolio funds, suspects weakness among Chinese consumers will show up in weak revenues from casino companies with heavy exposure to Macau.