All of which means global equities could fall by some 15 to 20 per cent, assuming that US bond yields rise in line with inflation. This in effect, would turn the clock back on the world stock market by three years. Under such circumstances, the shares of Chinese exporters and cyclical US stocks – in particular expensive sectors like consumer discretionary – would probably suffer the most.
However, the impact of a trade war will be felt far beyond the two world's largest two economies. In some instances, open economies in such as Taiwan, Korea and Singapore in Asia and Hungary, the Czech Republic and Ireland in Europe could be more vulnerable than the US and China (see chart).
The picture that emerges from our analysis is similar to what investors have previously experienced. The history of financial markets shows that the erection of trade barriers is bad for equity markets: the S and P 500 fell 10 per cent in the three months after US President Richard Nixon imposed a 10 per cent tariff on imports in mid-1971.
As the IMF’s chief Christine Lagarde rightly observed, nobody wins a trade war."
Luca Paolini, Chefstratege, Pictet Asset Management