To say the trade war between the U.S. and China—and its effect on U.S. investors—is confusing is an understatement, according to Anwiti Bahuguna, senior portfolio manager and head of multiasset strategy at Columbia Threadneedle Investments.
“It is incredibly hard to predict what you will see every morning. Will there be another escalation or another de-escalation?” Bahuguna asked. As President Trump acknowledged recently, he has second thoughts about everything—and he often acts on them, she said.
“Just over this weekend, we have been whipsawed and there was a selloff in the market Friday and again when the Asian market opened Sunday evening. The situation is a mess,” she said in an interview with Financial Advisor magazine on Monday. “But investors need to take a step back from the day to day. Hopefully, advisors’ clients are long-term investors.”
The situation causes advisors consternation because their clients are often confused by the daily news, but trade is a relatively small component of the U.S. economy, she said. The real impact comes when trade wars start affecting jobs, which in turn hurts consumer confidence, Bahuguna added.
“The impact of trade wars on confidence is a bigger source of investor uncertainty” than the trade war itself," she said
“The selloff in equities and rush to safe havens such as Treasury bonds, gold and yen are signs of damage to confidence. Business confidence has been affected, but consumer confidence is good now because jobs are still strong,” she said.
Trade conflict lowers capital spending as firms may decide to wait for trade policy uncertainty to end before undertaking major capital investments. In addition, supply chains are likely getting disrupted and reconfigured as U.S. producers try to find alternative sources of imported goods that are being targeted by tariffs, she said.
Although consumer confidence is still high, people outside of financial circles are beginning to wonder what is going on. “We have begun to see cracks in consumer confidence,” she said. But advisors should be telling clients that the current situation is just noise, she said, adding that investors should not go to cash.
“We are going into an election year and the chaos will get worse. We are going to be in a yo-yo mode for a while,” Bahuguna said.
Despite the chaos, Columbia Threadneedle does not see a recession on the horizon, “but risks have risen materially. The combination of a potential monetary policy mistake and trade wars has increased the risk of a recession,” she said.