Trump's trade war: What does it mean for investors?

Last week the Trump administration announced that it plans to impose new tariffs on steel and aluminium imports in order to counter 'unfair trade'. Steel imports are set to be hit with a 25% tariff and aluminium 10%.

US officials say the move is necessary to protect US interests against a glut of cheap Chinese steel. However, it has raised fears that the tariffs will damage both the US and global economy as a result of rising steel prices and also the threat of a wider trade war.

Sectors set to suffer

Market performance in general is dependent upon the health of the global economy. However, in the face of steel tariffs and the threat of a trade war, some US firms and sectors are likely to perform better than others.

Manufacturers that rely on steel and aluminium inputs are likely to be the hardest hit. Many domestic US firms also face souring investor sentiment as a result of the prospects of more expensive industrial inputs.

On Friday, the Dow Industrials index fell by 3%, with rising metal prices expected to squeeze margins.

The turn in sentiment can also be seen for individual firms sensitive to the price of steel and other industrial metals.

Machinery manufacturer Caterpillar, for instance took a 2.6% dive on Friday:

Source: interactive investor     Past performance is not a guide to future performance

At the same time, export-orientated firms, as well as firms seen as specifically American, are likely to be hit hardest by any retaliation. "Exporters are likely to suffer as they are most vulnerable to an escalation of any trade war," says Adrian Lowcock.

This can be seen with Boeing. The aerospace firm, down 1.4% on Friday, faces a twin squeeze of higher metal prices and potential retaliation in a trade war.

Source: interactive investor    Past performance is not a guide to future performance

Car manufacturers in the US are also likely to face trouble if a trade war does materialise.

The threat of retaliation isn't just from China. European Commission president Jean-Claude Juncker recently responded to the prospect of US-imposed steel tariffs by noting that the EU was prepared to respond by targeting imports of Harley-Davidson motorbikes, Levi jeans and bourbon whisky.

There are implications for US-focused funds investing in these and other business. "Any fund with exposure to steel and or autos will be the first to be affected," notes Darius McDermott, managing director of Chelsea Financial Services.

Who will benefit?

Areas unaffected by rising steel prices are likely to benefit, or at least outperform, in the short term. These, Adrian Lowcock, investment director at Architas notes, are likely to be businesses with a defensive or technology bias.

"Defensive companies, such as healthcare," are likely to benefit in the short term, Lowcock says. "Investors have been switching to these areas on concerns of the impact a trade war will have on the global and US domestic economies."

At the same time, he notes, "technology is seen as well-positioned to benefit from the tariffs". Chiefly, this is because "tech firms are light on use of industrial metals and have the flexibility and the knowledge to change and reduce any impact they might have." Moreover, the competitors of many tech firms also include more traditional manufacturers that are more likely to be hit by rises in the price of industrial inputs.

Indeed, the tech sector slightly outperformed the broader US market following the tariff news and its fallout.

But it's important to note that investors should be hesitant about making any portfolio changes too soon. "The issue for investors is what happens next," says Lowcock. "Trade wars can spill over into other sectors and areas of the markets, with tit for tat taxes and duties being implemented by different trading blocs."

However, future developments are not so clear. "So far, the Chinese have avoided stoking the fire and are adopting a wait-and-see approach," he notes. Investors might be wise to do the same.