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Trade wars - what does it mean for global business and our funds?

HL SELECT UK GROWTH SHARES
HL SELECT UK INCOME SHARES

Trade wars - what does it mean for global business and our funds?

Managers' thoughts

Important information - The value of this fund can still fall so you could get back less than you invested, especially over the short term. The information shown is not personal advice and the information about individual companies represents our view as managers of the fund. It is not a personal recommendation to invest in a particular company. If you are at all unsure of the suitability of an investment for your circumstances please contact us for personal advice. The HL Select Funds are managed by our sister company HL Fund Managers Ltd.
Steve Clayton

Steve Clayton - Fund Manager

27 July 2018

Donald Trump is a President with an unyielding America First policy. He’ll cut a trade deal with anyone, so long as America wins most from the deal. And if he doesn’t like a deal he’s already got, he seems prepared to rip it up and impose tariffs on goods coming into the States, with no need to negotiate first.

Markets are understandably concerned. Most of the value in global stock markets is in the shares of very large businesses that grew big by serving customers at home and abroad. Big companies need trade to flow freely around the globe.

Each and every day, we buy goods that have travelled across the globe. So trade wars, where nations impose tariffs on the passage of each other’s goods are bad news for global business.

China feels the heat

New US tariffs on cars and steel hit the headlines, but the pain is showing up in the price of commodities and their producers. China is the nation feeling the heat of US rhetoric most acutely. Not surprising really, given the huge transfer of manufacturing activity from West to East in recent decades and the resulting trade surpluses accumulated by the Chinese.

The flip side of China’s trade successes has been an enormous burst of building and infrastructure development as Chinese cities have expanded to cope with surging growth. There are now more than one hundred Chinese cities of over a million people, Shanghai alone has a population of over 22m people.

As a result, China has become far and away the largest consumer of traded commodities. Building roads and railways, vast cities and the power plants to light them requires huge amounts of iron, copper and energy.

According to Australia’s Reserve Bank, China has been accounting for 40% or more of the value of world trade in commodities ranging from iron ore to copper. If trade wars intensify, Chinese industrial demand could be hit and with it, Chinese demand for commodities.

Markets are starting to fret about these risks and commodity prices have been tumbling. Copper has fallen by 20% in recent weeks, zinc recently hit its low for the year. At the same time, Saudi Arabia has reportedly been cosying up to the US president and is said to be offering more supplies of crude oil to the market. That has seen the price of crude oil come rattling back from $80 a barrel to $73.

Price takers vs. price makers

These price falls directly impact the revenues that commodity producers earn for their output. Yet the companies producing energy, minerals and metals have no control over the process. The market price simply happens to them, rather than being something of their own making. That’s why the HL Select funds keep a very low exposure to commodity producers.

In our funds, we look for businesses that have more control over their own destiny.

Take Rightmove which is held in both the HL Select UK Growth Shares and HL Select UK Income Shares funds. If an estate agent wants to get their properties seen by the maximum number of potential buyers, only Rightmove can deliver the maximum number of eyeballs. No surprise then that the company has been able to hold or raise its prices through thick and thin.

Other great examples, held in both the funds include Sanne Group, a specialist fund administrator, whose clients need them each and every day and where switching supplier is rare indeed. Or BCA Marketplace; their car auction services provide the motor trade with vital liquidity and with the auction fees a tiny percentage of a car’s value, pricing can be strong.

Control over price offers options

Companies with products that are critical to their customers, and which sell on the quality and uniqueness of their offering are better placed to earn strong and predictable profit margins.

High margins mean that every sale generates a lot of cash, which helps the business keep borrowings under control. That keeps the banks off their backs when times get tough and means there are funds available both to reinvest back into the business and to pay dividends to investors.

That’s why we run the HL Select funds with a very low exposure to commodity producers. There are income attractions for sure, but these are always tempered by that inability to control their own destiny.

In a world where digitalisation and decarbonisation are becoming ever more critical, running low commodity exposures frees up funds to back digital winners in other industries and lowers the carbon intensity of the portfolio.

More about HL Select UK Growth Shares

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Important - This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information. Unless otherwise stated performance figures are from Bloomberg and estimates, including prospective yields, are a consensus of analyst forecasts from Bloomberg. They are not a reliable indicator of future performance. Yields are variable and not guaranteed.