19 June 2018
The prospect of a full-fledged trade war between United States and China has again been at the forefront of investors’ concerns in recent days. Monday’s (18 June) announcement by the administration of Donald J. Trump threatening additional tariffs on a further $200 billion worth of imports from China sent markets in greater China into a selloff. The main Shanghai share index fell 3.8 per cent on Tuesday, while Hong Kong fell 2.8 per cent (both markets were closed Monday for a public holiday).
The latest development suggests the recent détente in US-China trade talks has slipped. Indeed, recent months have seen economic relations between the world’s two largest economies in a dance best characterised as two steps backwards for every step forwards.
The concern now is how China could retaliate against President Trump’s latest action by increasing its own reciprocal tariffs. Such a move could push up input prices, which may prompt Chinese companies to either pass on the increased costs to consumers or allow them to eat into profits; neither outcome is favourable.
Still, the recent increase in trading volumes and volatility has not been exceptional by historical standards. And a pullback doesn’t come as a great surprise given the persistently high valuations in some sectors.
However, the ongoing tit-for-tat rhetoric and retaliatory tariffs point to tangible tensions in the bilateral economic relationship that are yet to be resolved, and suggest the situation could escalate further. US-China trade frictions remain broadly negative for the market and for investor sentiment, and are likely to weigh on forward earnings given the ongoing uncertainties coupled with a high base effect when compared with last year’s performance.
Raymond Ma - Portfolio Manager, China equities
Trade war headlines exacerbate what has already been some relatively negative news flow recently. May macroeconomic data released in the past week disappointed expectations across multiple fronts, from investment to consumption to credit growth.
Other interesting developments with the forthcoming introduction of Chinese Depositary Receipts (CDRs) have also impacted the market. Fundraising by the biggest banks in the past two weeks for funds related to the launch of CDRs on China’s domestic markets has sucked a lot of liquidity out of the market.
Overall, the escalation of trade tensions threatens to impact earnings, especially for exporters. At the same time, the observed disconnect between macro data and company data remains strong, which leads to questions over whether or not macro can serve as a leading indicator for micro going forward.
Lynda Zhou - Portfolio Manager, China A-shares equities
Despite capturing headlines, we assessed the previous tariffs to have less than a 0.2 percentage point impact on China’s GDP growth. The recent suggestion of further tariffs has moved markets again, but similar to the case earlier in the year we see this more of a sentiment-led move than one driven by pure economics.
There are real impacts we need to consider though. If and when additional tariffs materialize, they certainly stand to affect individual firms. Additionally, amid the current climate, policymakers in China are likely to find it more difficult to continue deleveraging and impose other tightening measures. We could see this ‘step backward’ on the fixed income side through reduced tightening or even short-term monetary or fiscal easing - both of which would be positive for bond prices.
For the moment, we are focusing on our highest-conviction names, evaluating how vulnerable they might be to any probable tariffs but more closely eyeing the more attractive valuations we are seeing. Today, especially on the investment grade side, we see this as more of a potential buying opportunity than a cause for alarm.
Eric Wong - Portfolio Manager, Asia fixed income
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.
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