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Billionaire investor Howard Marks warns of ‘dark’ impact of trade war

“If you take those four things: risks, low returns, high asset prices and risky behaviour around us, that tells me we should be more defensive than usual.”

Marks, who will appear at the Sohn Hearts & Minds conference in November, fears the escalation in trade tensions between the US and China will end up being a “negative sum game” for the global economy and society as a whole.

When too many people have too much money and are too eager to put it to work, bad things happen

investor Howard Marks

“We’ve haven’t had trade wars. In my [investment career] we’ve been on a steady path towards increased globalisation,” he said. “I think that it has been very beneficial for the whole world and very beneficial for the level of economic wellbeing in the world. It has raised the overall level of prosperity in the world. Full stop.

“When you subtract synergies and efficiencies…then I think overall wealth and overall societal wellbeing declines, and I think that’s what will happen.

“I think the reversal of globalisation will be bad for the world in terms of overall GDP.”

Following an announcement in early August that the US will introduce tariffs on all Chinese imports from September 1, a decision that has since been altered to introduce the tariffs in two seperate tranches, financial market volatility has spiked with widespread falls in financial assets closely aligned to the performance of the global economy, particularly China.

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The proposed broadening of US tariffs has driven the Chinese yuan down to an 11-year low against the greenback, further inflaming tensions with Washington who abruptly declared China as a currency manipulator last week.

While the spike in market volatility suggests a growing number of investors now see the prospect of a near-term trade deal between the two sides as highly unlikely, Marks isn’t sure whether investors have truly factored in the economic risks of a prolonged dispute.

Marks, like all other investors, admits he doesn’t know how the trade war will play out for markets.

“How bad would it be if we have a trade war, what’s the likelihood that we could have a trade war and is it adequately discounted in the marketplace? There’s no way to get easy answers to these things,” he said.

When asked to nominate a particular area that investors should be wary of chasing during this period of heightened uncertainty, Marks says private asset classes are looking particularly excessive given current valuations.

“Everybody in the investing world looks for what I call the silver bullet, the sure thing. The way to make a lot of money without much risk,” he said.

“We’ve seen money flow to both private equity and private debt, and when too many people have too much money and are too eager to put it to work, bad things happen in terms of prospective returns and risk.”

As for how investors can protect their portfolio from untimely and costly mistakes, Marks says everyone needs to have an understanding of how much risk they can tolerate.

“You should not undertake investing without having thought about what your normal risk posture should be,” he said.

“It should be a function of your age, marital status, employment status, whether your income exceeds your needs or vice versa, whether you have assets in the bank, how many dependents you have, whether you hope to retire soon, what your ambitions are and whether you can withstand, intestinally, the rigours of volatility.”

The Sydney Morning Herald and The Age are partners of the Sohn Hearts & Minds event to be held in Sydney on November 22. For more information go to: www.sohnheartsandminds.com.au

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