Prepare For Market Correction As US-China Tensions Threaten To Turn Into Currency War

While many are expecting further rallies in traditionally defensive assets such as gold and government bonds, AJ Bell's head of active portfolios Ryan Hughes said timing these investments could be difficult, while much of the rally has already taken place.

Instead, he suggested looking at defensive funds such as Sebastian Lyon's £4.3bn Troy Trojan: "The portfolio is currently spread across assets such as government bonds, cash and gold as well as some high-quality equities and has a very defensive mindset.

"While it may not be totally immune from the currency war, it has a long track record of preserving capital when things get difficult."

Central bank stimulus

Meanwhile, commentators agreed the Chinese currency devaluation is a signal that the PBoC, which has been hawkish so far, is preparing to introduce stimulus measures to mitigate the impact of US tariffs on the economy.

O'Connor said: "In the near term, we expect China to unveil some further stimulus measures in an attempt to cushion the Chinese economy from adverse developments on the trade front."

First Fed rate cut since 2008 fails to ignite markets

Similarly, the escalating tensions are likely to push the US Federal Reserve into making further rate cuts to give the equity market a boost.

"It is not in President Trump's interest to have a deep and sustained equity market correction precipitating an economic slump, with the 2020 US Presidential elections approaching," said Principal's Shah, adding that if the Fed were instead to cut rates in September and Trump were to remove the threat of further tariffs this could trigger an equity market bounce, representing an electoral "boon" for the President heading into 2020.