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02/07/20182 mins

Taxed like never before…!

As far as big love affairs go, the relationship between Americans and their cars is right up there. After all, this is the country that gave us the Henry Ford assembly line and the drive-through wedding chapel.

It’s fitting, then, that the car industry is the scene of the latest skirmish in the US-China trade war. Back in May, President Trump slapped a 25% tariff on $50 billion worth of Chinese imports. The Chinese retaliated in kind, targeting a range of US goods – including American cars.

For US automakers, there’s an irony in this outcome, as it’s the direct result of President Trump’s campaign promise to “Make America Great Again”. It’s also historically significant, marking the end of 20 years of cooperative trading relations.

Car manufacturers were the immediate losers from the spat, with share prices slumping in both the US and Europe. Then Daimler, which makes Mercedes SUVs in the US for onward sale to China, warned that profits wouldn’t meet previous expectations, citing China’s retaliatory tariffs, among other factors. This scenario teaches us, as investors, that protectionist policies, meant to placate a disgruntled populace, can have unintended consequences.

The reaction of motorcycle maker Harley-Davidson is a great example of this. The company incurred President Trump’s wrath after announcing plans to up sticks and move some of its production away from the US as a means to bypass the EU tariffs. He responded that “Harley-Davidson should never be built in another country – never!”

As contrarian investors, we’re ever alert to the effects of emotion and sentiment on stock prices. We were particularly interested in the president’s vow to “tax them like never before”, a reminder that every action has its reaction.

Escalating trade tensions between the US and the rest of the world have already dented the autos sector. But that could lead to contrarian opportunities further down the line, as swings in market sentiment almost always go too far. It’s our job to be vigilant for these opportunities – and to exploit them for our investors when they do.

 

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Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this promotion should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.

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