The risk of an all-out trade war between our two most important partners is rising and Australia is caught in the middle.
Heighten tensions between the US and China are having a big impact on global markets with the Shanghai Stock Exchange tumbling into a bear market as high flying US tech stocks like Apple Inc. and Intel Corporation take a nose dive.
This isn’t good news for Australia given our dependency on China’s economy but there could be a sector that could do well from a US-Sino trade punch-up.
But before I get into that, make no mistake that any trade war is very bad news for our local economy on a net basis – and that means downside risk for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).
Our miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) could very well be among the first few corporations to suffer from a trade fall out as US sanctions will crimp China’s demand for our minerals.
Large caps will also likely fare worse than their smaller counterparts as the big end of town is much more exposed to international trade, although that won’t save small caps from taking a beating if the trade war draws out.
But Australia’s tech stocks could come out winners under this Armageddon scenario. One of the most senior bankers at Goldman Sachs told the Australian Financial Review that US President Donald Trump’s move to block Chinese investments is US technology could see some of that capital flow into our market.
It’s hard to get a good read on this though as Trump is flip flopping on this with the latest reports indicating that the ban may not be as widespread as it was first thought to be.
But it only takes a small amount of capital from spurned Chinese investors to flow our way to make a big difference given the size of our tech sector.
The fact that we have a few success stories on the market like Appen Ltd (ASX: APX), WiseTech Global Ltd (ASX: WTC), Altium Limited (ASX: ALU) and Nextdc Ltd (ASX: NXT) – just to name a few – will give cause to Chinese investors to take a second look at our market.
Another consequence of a trade war is the impact on our currency. The Australian dollar could find support at the expense of the US currency if push comes to shove between the world’s two biggest economies.
Again, this is bad news for us on balance given our trade surplus (which means our economy benefits more when the Aussie is low), but importers might get some relief although probably not enough to offset the fallout of a slowing global economy.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, NEXTDC Limited, and Rio Tinto Ltd. The Motley Fool Australia owns shares of Altium, Appen Ltd, and WiseTech Global. 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.