Combating the Investment Uncertainty Created by the U.S. - China Trade War
The U.S. – China trade war has fostered investor uncertainty and contributed to an already sluggish global growth environment. Constructing an investment portfolio in these uncertain times, with the world's two largest economies locked in an economic battle of wills, investors need to pay particular attention to ensuring that they are still able to achieve returns, whilst protecting themselves from any potential fallout that may follow.
The ongoing battle between Washington and Beijing has been a significant source of concern for investors, not only in China and the U.S. but across the world. Christine LaGarde, incoming president of the European Central Bank, has commented on the trade war saying that: "it weighs like a big, dark cloud on the global economy".
Data coming out of the International Monetary Fund supports this statement, predicting that the dispute will decrease global gross domestic product by 0.8% in 2020. Acting as a further drag is Boris Johnson's hard-line stance on Brexit negotiations and the biggest pro-democracy protests Hong Kong has ever seen. Investors now more than ever need to find a way to protect and stabilize their portfolios without sacrificing returns.
Fund managers and Chief Investment Officers are feeling the pressure of this to the highest degree and it's their actions statements that will signal where general investor sentiment currently stands. With equities proving to be too volatile and risky an asset class to satisfy the portfolio requirements in the current environment, other asset classes such as commodities, real estate, and government debt are being favored.
Mark Haefele (global chief investment officer, global wealth management, at UBS AG):
"As a result [of downside risks], we are reducing risk in our portfolios by moving to an underweight in equities to lower our exposure to political uncertainty."
A real asset class that doesn't get quite the same media coverage as commodities and real estate, is infrastructure construction assets. Despite the lack of attention they receive, investors would be wise to not overlook them when making portfolio allocations.
Offering demand inelasticity and diversification due to their lack of correlation to returns on traditional financial assets, they are an excellent choice in the current economic climate. Particularly so in China, where an infrastructure investment-driven growth strategy is back in favor with the current leadership.
At the annual session of the National People's Congress on March 5th this year, Premier Li Keqiang announced $119 billion to be invested in railway projects and $252 billion in road construction and waterway projects. At the same time, construction companies are starting to move away from the business model of owning machinery and equipment and towards leasing it. This puts real construction assets on the right side of the demand curve.
Whilst financial assets have felt the effects of the trade war and will likely continue to do so, real construction assets have not. The slower growth environment in China has not only led to an increase in infrastructure spending but also a recently introduced economic stimulus measure, allowing local governments to use funds raised through local debt as equity capital for infrastructure projects. Although this will not create a boom-like effect on the economy, it's an important signal from Chinese officials that infrastructure development is a cornerstone of their growth strategy.
Real construction assets offer an investor a real store of value, passive income and strong returns potential, particularly with the infrastructure development ambitions of the world's second-largest economy. More importantly at this juncture though, they offer investors a safe haven from the U.S. - China trade war, with significant upside potential.