News of imposing all imported goods from China has significantly impacted stock market. The unseen fluctuation due to this tariff hopes and disappointments created worries of investment returns and more importantly, what the next step should be in managing your investment portfolio.
Given the first time in history a tariff is so severely levied both from how broad the imports it covers, but also from how quickly it was imposed, the potential impacts from tariff is confusing and hard to calculate due to how unprecedented it is.
However, as an investor, we also believe that whenever there is a crisis, there lies an opportunity. Those that can sustain and grow out of the crisis often can take on bigger market share of those who will be crushed in difficult time. Before we dive into what opportunities tariff could bring, let’s take a look at what is exactly a tariff.
A tariff is a tax imposed by one country on the goods and services imported from another country.
The action recently against China imports is to increase the price of all import goods and services purchased from China. therefore making them less attractive to domestic consumers.
When a tariff is imposed, very often it will trigger a counter action from the other country by imposing tariff for export to that country. The back ad forth retaliation based tariff changes is also referred as trade war. Trade war makes goods and services more expensive in both countries. Even though the idea of tariff is to make domestic made goods more attractive, the sudden change in pricing quite often results in unwanted outcome, higher pricing on goods and services one country needs, but is not able to produce at an acceptable cost. In this case, consumer will have to bear and pay for the higher cost and eventually could trigger a economy recession due to lack of affordability.
Now let’s talk about the potential opportunity due to the change in supply of goods and services.
Opportunity 1: It lies in the competitiveness created by tariff.
With limited domestic supply by raising price of imported goods, those companies with cost advantages and cash flows will be able to fight through the storm. Those companies that can afford to lower pricing to attract consumers will consolidate the market with bigger share gain. In contrast, smaller companies that are lack for scale of economy with higher costs and limited cash balance will be bleeding through cost pressure and eventually lose the battle.
Typically leading competitors with large market share have better chance to stand at last and even benefit from such economy environment. Look for those companies that are rich in cash with leading market share companies to add to your investment portfolio. Microsoft, McDonald are good examples.
Opportunity 2: Look for under-priced stocks due to wrong perception impact to them
Tariff can only impact goods and services that are being imported. Just because the U.S. imposes tariff on all China imports, it does not mean all Chinese companies will be impacted. Those companies who heavily rely on China domestic market or non U.S. markets don’t get impacted nearly as much. However, due to the lack of real understanding of tariff by some population, sometimes those companies that are not impacted by policy change can be shorted heavily as well to make them under-priced. The under-priced stocks will eventually come out of the truth by reminding investors their growth sustainability during earning seasons, which will bring back the stock price to fair value. Now you might have an opportunity to buy in those under-priced, under-valued stocks. IQ is a good example.
Opportunity 3: Look beyond the surface of tariff impacts, especially the path of realization of tariff change.
The trade war does not occur in one day. Typically there are many signs and negotiations taken place before tariff is realized. In today’s case, China and the U.S. have been in negotiation for almost half year. While both side negotiated, it was clear to China what could happen when negotiation fails. It is hardly believe that China would hold on the only hope of getting a successful negotiation as the only outcome. Chinese are well known for long term strategic thought in foreign policies. It is quite reasonable to believe that there are many moves that are in place to prepare for the worst case scenario. Therefore, the temporary market reaction to stock could present a strong opportunity for a come back.
When a market is uncertain, it is a testing time to your reaction to it. Exam your portfolio and be long term and strategic. If you have invested in healthy and valued companies, you will get extra bonus points. If you invested in high uncertainty stocks, exam the basic factors, competition, cash flows, customer geographic bases etc. Just because tariff will increase prices, it does not mean all goods are impacted especially when your investment don’t even rely on the markets being impacted.
Simple Wealth For Women is a blogging website focusing on financial discussions. I help women to crush debt, learn how to invest and make more money. I show you simple approach and provide you with specific ideas to help you get to financial freedom and build an amazing life.
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