Our market slumped on reports that US and China may be headed for a new trade war. But some ASX stocks will be hit harder than others if the speculation is accurate.
The S&P/ASX 200 Index (Index:^AXJO) surrendered all of its morning gains and fell 0.8% in late morning trade.
Investors got spooked after US President Donald Trump’s key trade advisor Peter Navarro is reported to have declared the Sino-US trade deal “over”, according to Bloomberg.
New US-China trade war upon us?
Navarro broke the bad news to Fox News during an interview when he was asked about the China deal.
The news sent US stock futures tumbling as well with the Dow Jones Industrial Average tipped to fall over 1% when trade resumes later tonight.
It’s unclear whether the trade agreement between the two sides is really over as Navarro’s comments comes days after Chinese officials recommitted to the deal during a meeting with US Secretary of State Michael Pompeo in Hawaii.
China increased the amount of US agriculture products it will buy to US$36.5 billion from US$24 billion under phase one of the deal, reported the South China Morning Post.
Take news with pinch of salt
Investors should treat the news with some scepticism, in my opinion. If the trade deal was off, I believe it will be boldly stated on Trump’s Twitter feed and not just to Fox News.
I can’t help but feel Navarro’s comment was meant to play to Trump’s support base after his disastrous re-election campaign rally in Tulsa, Oklahoma.
Further, Trump needs China to step up its buying program to win over key agriculture producing states.
The Chinese also may not want to upset Trump. Not because they aren’t up for a trade fight, but because I think they rather deal with Trump given his knack for striking deals and willingness to compromise to advance his cause.
Any other president might be less flexible and more driven by ideology.
ASX stocks worst hit by US-China trade war
But if I am wrong and trade tensions start to escalate again, this will be bad news for local and global investors – especially as we are trying to control the COVID-19 fallout.
While all sectors on the ASX 200 have slipped into the red after Navarro’s remarks were published, some are likely to suffer more.
One that will be in the firing line is global logistics group Brambles Limited (ASX: BXB). A trade war will cut global trade and impact on the group’s bottom line.
Another to suffer is alcoholic beverage group Treasury Wine Estates Ltd (ASX: TWE). The group has significant exposure to both the US and China.
Its wines are also impacted by discretionary spend, so if consumer sentiment is hurt by trade tensions, Treasury Wine’s sales will suffer too.
A drop in economic output from a trade war will also put pressure on base metals – more so than bulks. Base metals are used in industrial production, and lower demand for goods means less demand for commodities like copper and nickel.
That will be bad news for the likes of South32 Ltd (ASX: S32) and IGO Ltd (ASX: IGO).
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Motley Fool contributor Brendon Lau owns shares of Brambles Limited and South32 Ltd. Connect with me on Twitter @brenlau.
The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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