Managers expect further volatility from US-China trade war

US_China_trade_warAsset managers are expecting another volatile week for markets following a sharp escalation in trade tensions resulting in increased tariffs on goods by the world’s two largest economies. China announced retaliatory tariffs on $60 billion of US goods from June 1, 2019. It came just days after the US hiked tariffs on $200 billion of Chinese goods from 10% to 25%. “Spurred on by escalation in the US-China trade conflict, markets are in for another volatile week. This dynamic is unwelcome, but not unfamiliar to most investors by this point,” said Hannah Anderson, global market strategist at JP Morgan Asset Management. “Trade is a big risk for most markets. While the scale of the US China trade dispute has not thrown either economy too far off course, higher tariffs represent a large threat to corporate profits and a negative outlook for profits gets priced in quickly. “Movement toward a resolution allows tariffs to drift lower on investors’ list of worries and focus on other fundamental drivers of returns, and thus performance becomes much more about what else is happening in the world. This dynamic suggests that downside volatility will persist until an actual trade agreement is signed,” added Anderson. Meanwhile, Brad Tank, chief investment officer at Neuberger Berman opined that a failure by the world’s two largest economies to break the trade deadlock is the only genuine threat to economic growth in 2019. “An escalation of tariffs does not necessarily mean an end to negotiations and any hope of a deal,” said Tank. “Our view is this is very unlikely. Both sides can make space to climb down into, but it will take more than a couple of days and it will likely be done against a background of higher tariffs. “This means more weeks and months of uncertainty for investors on a matter they had started to price out of risk assets. Ultimately, we would not be surprised to see this translate into the loss of half or more of the gains equities have enjoyed over the first four months of the year,” added Tank. Howe Chung Wan, head of Asian fixed income at Principal Global Investors warned that currency markets are highly susceptible to the trade war and resulting actions by policymakers. The Taiwanese dollar, Malaysian ringitt and Korean won are particularly exposed to rising tensions. There is some element of silver lining for investors, however. “The escalation of US-China trade tensions could shape central banking policy in both countries, potentially encouraging the Federal Reserve to keep rates on hold and Chinese policymakers to remain supportive for easing measures,” Wan said. “In the Asian bond markets, we are positive on selected large cap Chinese property names which will likely benefit from more easing measures should the trade war worsen. Similarly, the prospect of increased liquidity support and policy easing means that Chinese Onshore Bonds offer attractive options.” ©2019 funds global asia

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