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Man The Barricades! How a Trade War Could Affect Your Portfolio

By John Persinos on February 1, 2017

Worried about a trade war? Well, here’s at least one bit of encouraging news: Scottish-made haggis may soon come to a table near you.

President Trump wants to lift the trade ban on British meat that’s been in effect since the “Mad Cow” epidemic in Britain in 1986 — and haggis makers in Scotland are thrilled. In case you don’t know, the Scottish delicacy of haggis is comprised of sheep offal (heart, liver and lungs) stuffed inside the animal’s intestine. Trump, whose mother was born in Scotland and who operates a golf course there, reportedly promised the Scots that he would lift the meat ban.

For other industries, though, the situation is less upbeat.

President Trump threatened last Thursday to slap a 20% tax on imports from Mexico to help pay for his promised border wall, an announcement that triggered anxiety on Wall Street, punished U.S. stocks, and caused Mexico’s president to cancel his planned trip to the United States. Trump also has threatened to punish China for supposed trade violations by imposing a 45% tariff on Chinese imports.

What’s it all mean for your portfolio? Let’s turn for insights to Jim Pearce, chief investment strategist of Personal Finance and Director of Portfolio Strategy for Investing Daily.

The Art of (Trade) War…

Jim Pearce accurately predicted that Trump’s first order of business would be to shelve the Trans-Pacific Partnership (TPP). Signing the executive order against TPP was easy. But as Jim explains, now comes the tough part:

The difficulty comes from replacing it with something Congress and our Asian trading partners can all agree on, a feat that will require extraordinary tact and diplomatic finesse. Because this will be the first time these nations will negotiate with our new president, they will want to set terms that they can live with for at least the next four years.

For that reason, I don’t expect to see the trade pact replaced with a new deal this year. The upshot will be a disruption in trade, with large multinational consumer goods manufacturers and many information technology companies hurt the most. To placate these businesses, many of which currently hold large sums of cash overseas to avoid U.S. taxes, Trump will dangle tax reform as a carrot…

If a tech trade war between China and the United States materializes, the Chinese already have a ready stable of Asian vendors to ply its markets with almost all the hardware it needs…”

Who wins, who loses?

Trump has pressured U.S.-based companies to keep and create jobs in this country and has lambasted via tweets several American businesses that have operations abroad. Some analysts warn that if a trade war erupts, no one wins and you should dump stocks altogether.

We wouldn’t go that far. But keep in mind, particularly at risk would be U.S.-based multinationals with extensive operations and revenue sources in China and Mexico. The most serious ramifications would occur in the world’s second-largest economy, China.

Topping this list of vulnerable global players are familiar Big Pharma names such as Pfizer (NYSE: PFE), Merck (NYSE: MRK) and Johnson & Johnson (NYSE: JNJ).

Probably the worst affected stock would be Chicago-based aerospace/defense giant Boeing (NYSE: BA), the largest manufacturer of aircraft in the world and America’s number one exporter. If Trump slaps China with high tariffs for “unfair” subsidies and trading practices, China would almost certainly retaliate and give its substantial aircraft business to Boeing arch-rival Airbus Group (OTC: EADSY).

Of course, other companies would suffer as well — and many of them are blue chip stocks popular in retirement portfolios. Caught in a trade war crossfire would be sales of aircraft jet engines made by General Electric (NYSE: GE); autos made by General Motors (NYSE: GM) and Ford (NYSE: F); iPhones and laptops made by Apple (NSDQ: AAPL); soybeans and corn grown by Archer Daniels Midland (NYSE: ADM); and consumer products made by Procter & Gamble (NYSE: PG) and Colgate-Palmolive (NYSE: CL). Just to name a few.

However, Trump intends to offset the pain of trade restrictions by granting global corporations significant tax cuts on cash hoards that are repatriated from overseas. That would be a boon for a few of the aforementioned companies, specifically General Electric, Apple and Pfizer, as well as IBM (NYSE: IBM), Microsoft (NYSE: MSFT) and Intel (NSDQ: INTC).

Lower taxes on repatriated cash would especially benefit Silicon Valley, because deep-pocketed technology giants probably would use the proceeds to launch a wave of acquisitions, which in turn would stimulate innovation and job creation.

As you can see, sorting out the winners and losers of a trade war isn’t so simple. For now, sit tight and don’t make any impulsive moves based on fear. Our investment strategists are monitoring these fast-moving developments; continue following their advice. We’ll provide guidance as events warrant.

In the meantime, who knows? Perhaps haggis will one day show up on the White House menu.

Got any questions about how a trade war could affect your investments? Drop me a line:— John Persinos

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