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Trump's Tweets Hit Global Markets - Wealth Managers' Reactions

Tom Burroughes, Group Editor , May 8, 2019

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Fears of escalating US tariffs on Chinese imports - and retaliation - have hit global markets. Here are some reactions.

President Trump has thrown a large rock into the trade pond with his Sunday tweets about raising tariffs on China to 25 per cent, on the existing $200 billion of tariffed goods by this Friday. He said he is also considering higher tariffs on the remaining portion of $325 billion of imports. 

Markets have sold off, suggesting that investors had started to relax about protectionist fears, perhaps proving that with this administration, it never pays to get complacent. 

Here are some wealth managers’ reactions. 

Thomas Poullaouec, head of multi-asset solutions Asia-Pacific at T Rowe Price
The risk of a US-China deal not being reached by this coming Friday has risen significantly, with trade tensions likely to be a drag over the short term as market consensus has priced in a done deal.

Asia is likely to bear the brunt of this pain as markets in the region have been far more complacent than other markets around the globe, with a drop of anything in the magnitude of 5 to 10 per cent a real possibility. However, over the medium and long term, we remain constructive on the Asian stock market because of easing policies, supportive valuations and forecasted economic recovery. As was recently seen in the Chinese stock market, a sharp drop would likely lead to subsequent price stability and create a more conducive environment to buy back into. 

Emerging markets stand out as a potential opportunity to leverage any resulting weakness from the trade induced volatility: we see little change in the positive domestic stories that are going on in China involving pharmaceuticals and technology companies. We would also look at companies which can better benefit from the stimulus measures directed to boost the country’s GDP (gross domestic product) growth.

The US-China trade tensions will remain a focus for the months ahead and the situation remains fluid. With Vice Premier Liu He travelling to the US, it is reassuring that discussions are still ongoing and that negotiation tactics are likely to be seen going forward as both sides edge towards an agreement. A deal in the short term would amount more to a ceasefire than result in grand resolutions on major problem areas such as IP protections and technology transfers. With tariffs likely to hit the US consumer harder and with an upcoming US presidential election, it would appear that time is more on China’s side as President Trump comes under increasing pressure to show tangible results from these trade negotiations.

Aninda Mitra, senior sovereign analyst at BNY Mellon Investment Management
The relative performance of each country’s equity markets and the outlook for their cyclical macro positions may have played a role in driving what may have, recently, become an impasse in the negotiations and prompted the outburst from Trump. There has been talk lately of the US side giving up on efforts to alter China’s policies on state subsidies as well as the Chinese trying to re-negotiate earlier concessions.

The macro impacts from a limited tariff war are small. A 10 per cent US import tariff on $200 billion of goods imports takes off 0.14 per cent from Chinese GDP, assuming perfect substitution effects from higher tariffs on US import demand. The impact of retaliatory 10 per cent Chinese tariffs is negligible for the US. But a 25 per cent tariff rate across more than $500 billion of US imports from China (and more than $100 billion of US exports to China) would be much larger. The IMF estimates that the bilateral imposition of 25 per cent tariffs could cost China around 1.3 per cent of its baseline GDP and as much as 0.3 per cent of US GDP. Trade diversion and export/production supply-chain relocation will also throw up net gainers from Sino-US trade conflict. But first, the rest of the world will also have to contend with a slowdown in both China and the US, the two largest engines of global growth, as well as a possible tightening of global financial conditions.

Dong Chen, senior Asia economist at Pictet Wealth Management, part of Pictet, on the US-China trade talks.
Trump’s threats increase uncertainty. We still expect a trade pact ultimately, even though it will likely not cover the most complicated bilateral issues. It has been our long-held view that any trade truce could be fragile, especially as concern about China is also shared by Democrats.

Indeed, we believe that US-China trade will remain a key issue beyond 2020 given the bipartisan animosity towards China in Washington. Should tariffs be imposed, we expect the Chinese authorities to step up policy support to the economy.

Chinese equity markets, which have rallied since the beginning of the year, were clearly taken by surprise by the latest Trump threats and corrected sharply.

But a number of factors could still support Chinese equities in 2019, such as Trump’s eagerness to strike a deal, the scope for further stimulus in China, and the ongoing inclusion of A-shares in major equity indices. We therefore do not see any material cause for concern at this stage, provided bilateral talks continue and China’s economic momentum holds. Europe and Japan are more exposed to emerging-market assets and would likely suffer more from a tariff-related market correction.

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