MENU

Here’s the biggest threat to our bull market that most investors are overlooking

It’s not spiking bond yields, Chinese growth or burgeoning debt that poses the greatest and nearest term risk to our two-year bull market.

The greatest threat is probably something you have not even thought much about. That is going to change as the US moved a lot closer to triggering a trade war with China after the US Commerce Department released its recommendations on imposing tariffs and quotas on imported steel and aluminium.

Any trade war between our most important strategic and economic partners is going to cost us big as Australia will be caught in the crossfire.

One of the first places we will feel the pain is in our equity markets and that is why investors should be concerned that the US Commerce Department is using “national security” as the rationale for pursing President Donald Trump’s protectionist agenda as it allows the president to bypass congress in imposing harsh restrictions on those imports.

You can expect a tit-for-tat response from the Chinese and it’s miners like Rio Tinto Limited (ASX: RIO) and South32 (ASX: S32) that will take the first blow as a trade war will severely curtail demand for our hard commodities, particularly alumina and iron ore.

Ironically, the news sent metal prices jumping higher on Friday with aluminium leading the charge with a 2% gain on fears US manufacturers will lose access to cheaper steel and aluminium.

But Australia sells most of its raw materials to China so the higher commodity price will be more than offset by lower production from falling demand.

What’s worse is that the pain will spread in at least two ways. The first is the impact on global economic growth – the key reason used to justify the rally in global equity markets, including the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).

Slowing global and Chinese growth will significantly impact on Australia’s gross domestic product (GDP) while inflationary pressures build from a trade war.

It was the higher inflation reading in the US late last week that sparked the most recent rise in bond yields, which hung over our market.

Inflation will definitely rise further if a trade war breaks out and that means higher borrowing costs for everyone.

Slowing growth and escalating inflation is the recipe for the dreaded “S” word – stagflation. A period of low to no economic growth and high inflation will be a devastating outcome for our share portfolio and the wider economy.

This means all blue-chips will suffer from our landmark financial institutions like Commonwealth Bank of Australia (ASX: CBA) and Macquarie Group Ltd (ASX: MQG) to our favourite industrials like CSL Limited (ASX: CSL), Cimic Group Ltd (ASX: CIM) and Treasury Wine Estates Ltd (ASX: TWE).

A trade war could still be averted and the latest move by the US Commerce Department may be nothing more than manoeuvring to give President Trump an edge in trade negotiations.

However, investors should pay very close attention to this issue from now on. I will be closing most, if not all, of my equity positions if a trade war breaks out.

There is some good news though. Regardless of the political environment, the experts at the Motley Fool believe there is a sector that is set to take-off.

Click on the free link below to find out what this sector is and the stocks that are best placed to benefit from this investment thematic.

The Richest Man Alive Invests in This

The richest man in the world has just launched a $100 million investment fund and investors who don't take note could miss out on a massive opportunity.

And it isn't by sheer luck. He did it by looking to the future and investing in the big ideas of tomorrow.

This could be your chance to get in on the ground floor!

Click here to discover more!

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia 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 Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.