When the Two Elephants Fight …

Elephant fight 2With the high surge in Asian markets on Friday, investors were given a breather out of the trade war threats for the past 2 weeks. Will such a surge be a recovery process from recent market rout or just a technical rebound positioning for further dip next week?  Let’s explore some background works before coming to this issue.

Trade War Rhetoric

As far as the two giant economies are concerned, trade war rhetoric has shattered mostly for China market. China markets have fallen the most compared to US markets. At the near close to the month of June, Hang Seng Mainland 100 index has fallen -9.56%. Whereas major US markets remain flat or slightly negative (Chart A).

China the loser
China market is the greatest loser in the first round of rhetoric trade war fight

It shows that US has won the trade war rhetoric for the month over China. This is the result for the first round of the trade war.

However, this result could be negative not only for Asian investors but for investors of the whole world in general, including the US.  Because this will encourage President Trump to continue to pursue his trade protectionist policy and run fully into reality. Consequently global economic contraction will be inevitable.

In this inter connected global business chain, no country will be exempted from its harm if an economic recession hit out.  The contraction reality could be realized as early as the end of this year or the latest by next year.

Elephants Fight

Trump has been trying to keep US economy strong, preventing it from being taken over by China. While China is trying protect its own advantage of becoming number one global economic super power.  We are witnessing at this moment a moment of economic power shift in human history. It’s like two giant elephants fighting, all surrounding bushes being stampeded.

China has been pursuing European countries to cooperate together to combat against US’s protectionist policy.  It has been diverting investment focus away from US and shift towards elsewhere such as Europe, South America, and Middle East etc. Will the shift or handling over the crown of global economic super power successfully from US to China, only time can tell.

This process of struggle will continue on until the whole world economy being dragged down to the bottom. And from there, whichever country emerges to lead the world economy exiting global recession will take the crown.

Gold as Safe Haven

During the process of the giants fight, all global markets went into consolidation. Conventionally, investors are expected to flock into safe haven vehicles such as gold and cause gold price to spike high.

Gold and Gold Fund
Spot gold prices (picture above) dropped while RHB Gold and General Fund (picture below) kept itself steady.

However, this was not happening during the last 2 weeks, gold prices did not increase but dropped. Interesting to note that, however, the two funds invested into gold related fields under my recommendation did not drop according to gold prices. They were both able to maintain their positive ground.

It is possibly either the non-gold direct investment (20-30%) has acted as cushion for the drop or the fund managers did an excellent job. This observation has proven that these two funds can be hold for long term during this time of uncertainty.

Let’s come back to the issue whether market will continue to resume bullishness or fall further away.

Market Forward

I believed most investors do remember the critical date of July 5th, 2018.  It is the date that Trump set to decide the implementation of the import tariff hike from China for the first 35 billion worth. And China has promised to retaliate equal strength in quality and quantity. If China does that, Trump threatened to impose further tariff hike of 200 billion worth of Chinese goods. And China did not compromise but promised to fight back, possibly no longer with imported goods from US but other means like direct attack with US listed corporate or businesses etc. This was the tit-for-tat rhetoric back and forth childishly played out that sent global market down substantially over the past 2 weeks.

However, the implementations of those policies mentioned above would not send market down the second time themselves, because markets have already factored those known facts ahead of time. However, if there are new development, surprises, or complications, these will bring the market down again.  When stock markets are hit, it’s only a matter of which market goes down the most.

There will be 5 day trading sessions to go before July 5th., if there is any negative news breaks out before that date, market will also be nervous and affected. If otherwise, market will continue to surge higher.  Investors will put their bets that Trump would listen to US business professional warnings about how damaging it can cause to US economy if full implementation of US tariff hit out against China.  They would be betting that Trump would change his mind.

For next week or so, there will be exciting and challenging weeks for high risk investors. For conservative investors, it is not wrong to roll back into cash especially for those with small capital or beginners. Because capital protection is the foremost important principle in investment as legendary investor, Warren Buffet put it.

Thank you for reading this article!

 

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RISK WARNINGS

The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions.  This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to make up individual investment preferences.

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