In continuation to my earlier article https://arthabodhi.wordpress.com/tough & testing times, where I had mentioned that apart from Quantitative Easing and Quantitative Tightening, there are other threats coming from Trade war and ban on oil imports from Iran on global economy.
Here in this article, let’s understand what these are and how it is going to be impacted in our investment journey.
What is this trade war?
Essentially, a trade war is a back-and-forth dispute wherein a country imposes tariffs on certain imports in order to restrict trade. In response, the country or countries affected by those tariffs impose their own fees on imports. Put simply, tariffs are fees or taxes assessed on certain products when imported into a country.
In the case of the China-U.S. squabble, Trump imposed aluminum and steel tariffs in early March in order to protect those American industries. He then announced 25% tariffs on $50 billion to $60 billion in Chinese exports to the U.S., including aerospace, information and communication technology, and machinery. Subsequently, China placed fees on a wide range of U.S. products, including scrap aluminum, sparkling wine and apples.
Trump then promised tariffs on about 1,300 Chinese products. Hours later, China came out with more tariffs, this time taking aim at Boeing planes. More recently, Trump was entertaining the idea of another $100 billion in tariffs.
China warned it would fight back “at any cost” with fresh trade measures if the United States continues on its path of protectionism, hours after President Donald Trump threatened to slap an additional $100 billion in tariffs on Chinese goods. What is the impact of such trade wars on the global economy and India in specific?
As it is said, when two elephants fight, the grass suffers, this is a classic case where two giants i.e, the USA and the China are fighting for the supremacy in the global economy via trade wars. In the interim, we have already seen, the shaken stock indices, currency markets across the emerging markets.
While for India, there may not be direct impact, however there can be indirect impact such as increase in import costs which may lead to increase in prices of goods or low margin of profits. This may lead to lower production and may cause industry slow-down. Cost of inflation may go up and higher interest rates may cause cost of debt also high. These events may turn out to be a vicious circle. For all we may know, we may be in for another slow-down.
Now what is this restriction on Oil Imports from Iran?
USA has issued instructions to all countries including India and China to stop importing Oil from Iran by November this year. What it means to India and its economy?
For every $1 increase in crude oil price, we may end up increasing our Current Account Deficit by $1 billion. This will also add up to the vicious cycle which is getting formed due to trade war.
Now we don’t know in reality, how much impact these two impending events will have on Indian Economy and how stock markets behave in next one / two years.
There could be possible three outcomes from these events and they are 1) May be no impact and India continues to grow OR 2) May be it is a repeat of 2008 or worse than that OR 3) May be just remain flat and no growth.
Because, we cannot predict how the future will be, we can at the least understand where we stand from a risk point of view and take decisions while investing for our future.
You & me as an investor, should always keep in mind the following points when such events come up and news and media sharing gloomy picture :
- Do I have sufficient money in safe instruments ie Liquid / Fixed Deposits / FD alternatives to cater to my next 3-5 year’s goals & emergencies?
- Do I have an asset allocation (Financial) plan as per my financial goals?
- Does this news impact my earning or saving capacity? If yes, it’s time to sit back and review and re-organise. If no, continue with asset allocation and continue investments.
One last but not the least thing to remember is to stay calm in such phases and have very moderate expectations of returns in such years.
Here I want to end with few finest wisdom shared by Morgan Housel in his recent blog (http://www.collaborativefund.com/blog/little-money-rules/) , which is worth reading, re-reading every time emotions come in between your financial decisions.
- About once a decade people forget that bubbles form and burst about once a decade.
- Emotions can override any level of intelligence.
- Solutions to problems can be shockingly simple; Getting people to adhere to simple solutions can be shockingly difficult.
Remember, the only mantra for successful wealth creation is right asset allocation, disciplined investing, having patience and staying invested for long term. Here I am not saying ignore the noise around but I am saying, remain informed of what’s happening around and stay invested with right awareness and not with fear.
Happy Investing and wealth creation!!!