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US-China Trade War: How Normal Investors Are Affected and How Can You Invest Amidst It

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Mark Cheng

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Ask anyone on the street which company had likely been most impacted by the US-China trade war that has been going on for some time now, chances are that the most common answer you’re going to get is “Huawei”.

While there’s certainly been a lot more that’s been going on apart from an unprecedented impact on the (currently) second largest smartphone manufacturer in the world, it is understandably hard to get a tangible sense of just how the current trade war actually impacts Singaporeans.

 

What actual impact does the US-China trade war have?

The issue with Huawei might be slightly further distanced from the trade war, but there is one other massively popular smartphone brand that has been at the forefront of trade war impact for a while now.

Yes, we’re talking about Apple. As recently as May, Apple shares dropped by nearly 6%, and it’s not hard to see why this trade war has had such a huge impact on the tech giant. Firstly, if you have no clue what is going on at all, one major factor in this US-China trade war are the tariffs on Chinese exports that have been imposed by President Trump. In retaliation, China has responded by raising tariffs on some US goods. This is where Apple has been hit doubly hard.

A large part of Apple’s production sits in China, where Apple assembles their electronic products including their globally-popular iPhone. This makes it largely susceptible to price increases with the tariffs places on Chinese exports.

The second part of this equation is the fact that “greater China”, namely China, Hong Kong and Taiwan, make up a significant chunk of Apple’s revenue. How significant? In 2018, Apple reported that the region accounted for $51 billion in revenue, making it their third-biggest region after the Americas and Europe. That’s 3 countries versus two continents.

 

How does this impact the market and investors?

The issue that Apple is facing is a good example of the key driving factor that is impacting markets in such a great way: uncertainty. As we all know by now, uncertainty is a critical determinant in market performance, and Apple’s stock performance is a good indicator of just how much uncertainty there is in the market right now.

There are spill over effects of Apple reacting to this trade war as well. In Oct 2018, an interesting report emerged about just how huge that impact is when it was reported that the once-richest woman in China ended up becoming the biggest loser out of China’s billionaires. Zhou Qunfei’s company, Lens Technology Co, was a supplier for Apple’s iPhones and Tesla’s cars, but a selloff in 2018 saw a 62% slump in Lens Technology shares as investors moved to dump shares of Apple Inc suppliers on the back of President Trump stepping up trade tariffs on China. It also didn’t help that Elon Musk also agreed to resign as part of an SEC probe.

 

What can investors do to trade during a trade war?

As we have mentioned previously, a market decline doesn’t always mean having to lose money. While stocks might tumble, it doesn’t mean that you can’t turn a profit from this. This is where short selling comes into play.

Simply put, short selling allows you to “sell off” a stock at a higher price, and then buy it back at a lower price later on. However, this can be tricky in a volatile market because companies might limit the amount of stocks that are available for short selling to prevent an entire crash.

This is where a Contract for Difference (CFD) can help. With CFDs, you are still able to make money from the drop in stock price by shorting the stock, without actually having to purchase or own the stock itself. And because CFDs allow you to trade on margin, your initial cash input doesn’t have to be as high as trading the actual stock.

 

But obviously a trade war is going to cause huge market volatility. How do I deal with that?

When it comes to managing risk, different investors have different ways of coping. Some people pull out of equities altogether and dive into less risky products. But there are other ways that you can still trade whilst managing your risk.

This is one of the key considerations that IG had when they came up with their Guaranteed Stops function, which is an extremely useful means to help average investors cope with sudden market crashes. Guaranteed Stops ensure that you close your position at the exact price that you set, as opposed to a normal stop that gets triggered when a price level drops below the set amount, but doesn’t necessarily close at that amount.

Not sure how effective this is? Check out our article on how average traders can protect themselves from sudden crashes.

We certainly cannot foresee how and when this trade war is going to conclude any more than Huawei users can foresee how long more they are going to have functioning phones (let’s just hope everything goes back to normal!), but that doesn’t mean there aren’t ways to deal with it.

If you want to try out the various tools and features on IG’s platform, you can even open a free demo account which lets you test things out with $200,000 virtual credits before you put real money in.

What are some of your thoughts around trading during this trade war period? How do you think things will go? Share your thoughts with us here!

 

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Mark Cheng

I rant and rave a lot, but when I'm not busy doing that, I'm managing the content for MoneySmart. I love Singapore, but I also believe in helping it to improve bit by bit, and that's where MoneySmart comes in. Have some thoughts? Drop me an email at [email protected]