It is essential that investors in the UAE avoid complacency in the light of fresh geopolitical fears.
Following the announcement this week by the US President Donald Trump administration of tariffs on another $200 billion in Chinese imports, global markets have been in turmoil, and should the trade war escalate, UAE-based investors could find themselves caught up in the crossfire.
The additional tariffs follow the United States last week imposing 25 per cent levies on $34 billion in Chinese products, with China retaliating with tariffs of the same amount on US imports.
Consumers in the UAE and around the world will no doubt ‘feel the pinch’ as a result of these tariffs. Dubai’s principal trading partner is China, with 13 per cent of trade.
In 2016, according to Global Edge, Chinese imports to the UAE reached $22.4 billion, while exports to Hong Kong were at $3.75 billion.
As such, Mr Trump fanning the flames of the trade war will likely spark a chain of negative events across the globe.
First, it will result in higher inflation in the US as import tariffs elevate the cost of imported goods. Meanwhile, domestic producers will be able to hike their prices as competition from overseas dwindles.
As a result, interest rates will be increased, and the dollar will rise.
Before the trade war broke out, cheap goods from China helped to sustain prices and, as such, keep US and global inflation, low.
However, to offset rising inflation, the Federal Reserve will, in all probability, hike rates. In turn, strengthening the dollar.
A more robust dollar will also lead to more stress in emerging markets. They are especially susceptible to a fall in exports due to an increase in quotas and imports from the US, as exports are a main factor in driving growth for a large number of under-developed countries.
UAE-based investors may also experience ramifications of the trade war in equity markets. Indeed, emerging markets are incredibly dependent on investors’ risk appetite, and this would, in all likelihood, decrease should the trade war intensify.
Moreover, possible fluctuations in the financial markets could also heavily impact the UAE, with the dirham pegged to the dollar.
As such, should the trade war ramp up between the world’s two largest economies, it is crucial that investors avoid complacency and make sure their portfolios are sufficiently diversified across different sectors, classes and geographical regions.
A long-term multi-asset approach to investing – including a combination of global equities and bonds – is broadly considered the most effective. History has taught us that a balance of 60 per cent of global equities and 40 per cent of global bonds is a suitable combination to offer investors good risk-relative returns.
Indeed, it is widely recognised that one of the main benchmarks of successful investing is not ‘putting all your eggs in one basket’. Diversification is key in order to make the most of potential opportunities that may present themselves and sidestep risks that market volatility brings.
Therefore, investors should always try to be as diversified as possible, perhaps using the 60/40 model as a guide.
Right now, amid the trade tensions, vigilance is crucial for investors in the UAE and globally.
They must prepare themselves for months ahead of increased posturing from the various parties, which will most likely heighten market turbulence.