NEW DELHI : As the world’s two biggest economies US and China engage in a bitter trade war, with Beijing levying 5 per cent tax on US crude from September 1 and the US beginning to collect 15 per cent tariff on more than $125 billion in Chinese electronic imports, markets all over the world are likely to roil. This is a time for caution for investors, many of whom are likely to look at other areas such as bullion and oil to hedge their bets in stocks and bonds.
Traditionally, investors have used the bullion and oil futures markets as hedges against a volatile stock market. Gold prices hit an all-time high in August crossing the psychological Rs 40,000 for 10g. Many say that if markets continue to be volatile, it could rise further.
“Matters have been complicated as there is also the spectre of a worldwide recession. While most traders remain optimistic about the bullion market despite record prices, the recession fear has spooked oil markets, which feel demand will contract,” said Vikram Sahney, a commodity trader.
The 2019 outlook for West Texas Intermediate crude futures CLC1 was cut to the lowest since January 2018, at $57.90 per barrel, below last month’s forecast of $59.29. WTI has averaged $57.13 this year. This means many of the safe havens which investors traditionally sought may no longer be there.
“Commodities depend on the economy too. If there is downturn in economy, there is downturn in demand for commodities. But you can be careful and pick and chose commodities that represent needs of the future, such as cobalt, lithium and silver, which will be needed in the electric and solar batteries and electronics of the future,” said Sahney.
Stocks too can be recession-proof to some extent. McDonald’s is a recession-proof stock according to NASDAQ analysts.
“Industries like food and medicines will always have demand. If firms within those industries cater to the lower middle class, they will continue to sell as richer people will switch to buying cheaper food and clothing. So, look for them,” said Amit Bannerjee, an independent merchant banker.
Markets are expected to be turbulent not just due to tariff war. The news from the currency market is that Chinese yuan declined to 7.157 to the dollar last Friday, its weakest rate since January 2008. The yuan, also known as renminbi, fell below a key level of seven to the USD earlier this month, leading the US to allege that China is deliberately weakening it to gain trade advantages.
Economists estimate that between 2015 and 2016, the Chinese authorities spent $1 trillion shoring up the value of yuan from weakening beyond seven to USD. This policy of artificially strengthening the yuan seems to have been foregone last month as the yuan was allowed a free fall in order to make Chinese exports competitive, in the face of higher tariffs imposed by the US.
“Such huge changes in currency policy by a key global player spark off retaliatory weakening of currencies by rivals, which will impact stock and bond markets. For institutional and individual investors, it is usually seen as a signal that it is time to hedge for safety,” said Prof Biswajit Dhar of JNU.