High profile investor Warren Buffett is sounding the alarm bell on escalating trade tension between the world's two largest economies and he warns that a full-blown trade war would be "bad for the whole world".
But he was surprisingly upbeat on how the negotiations between China and the US would play out, according to a report by Reuters.
That should hopefully give some comfort to ASX investors with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index losing 0.8% yesterday as global markets were rattled by the news that China is considering calling off this week's meeting with US trade officials.
Market reaction to Trump's tweets
Interestingly, the S&P 500 index and the Dow Jones Industrial Average shed a modest 0.5% and 0.3% in overnight trade, respectively, although US stock futures are pointing to another weak trading day tomorrow.
Buffett said the global market response was "rational" after US President Donald Trump tweeted that he would increase tariffs from 10% to 25% on US$200 billion of Chinese imports from this Friday and is considering slapping a similar tax on another US$325 billion of Chinese goods that were not targeted before.
Buffett's investment conglomerate, Berkshire Hathaway, owns or invests in several companies that are connected with China, including Apple Inc. and Chinese car maker BYD, according to Reuters.
A full-blown trade war "would be bad for everything Berkshire owns" and would be "bad for the whole world" he explained.
Buffett's tips on navigating the trade war
However, Buffett believes this worse case scenario is unlikely and he is urging investors not to panic and sell shares based on negative headlines.
He added that the US and China will be the world's superpowers for the next 100 years and there will always be tension between the two nations. For this reason, he isn't changing his investment strategy.
"We will buy the same stocks today that we were buying last week," and would be "delighted" if a good Chinese business expressed interest in a Berkshire transaction, Buffett said.
What this means for ASX investors is not to overreact to the trade news, especially those with a longer-term investment horizon, such as SMSF trustees.
Foolish takeaway
You shouldn't be surprised by Trump given his penchant for the dramatics and his belief that acting unhinged gives him the upper hand in negotiations.
Having said that, I don't think calm will return to markets in the short-term and stocks could come under pressure over the next several weeks.
The thing is China may not be used to negotiating with someone like Trump (he's certainly unique!) and we shouldn't underestimate the risk of a misstep before a final solution can be reached.
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