The Sino-US trade and tech war has entered a new and more concerning phase as July marked the first anniversary of its initiation – when President Trump imposed a 25% tariff on $34 billion worth of Chinese goods. A year of on-and-off negotiations – and respective up-and-down headlines driving the markets – has seen this escalate to some $250 billion now. In the latest twist, at the recent G20 Summit in Osaka in late June, Trump and China’s President Xi Jinping agreed to put further tariff increases on hold and to resume bilateral negotiations. This “ceasefire” news caused stock markets to rally after days of slumps, but it does not mean they are any closer to forging a deal. In fact, this accord is similar to what emerged from the last Trump-Xi meeting at the G20 summit in Argentina last December and neither leader has agreed to anything more but perhaps more sanctions.
Our Global Equity fund managers believe that both the US and China should be concerned about how the trade and tech tensions impact their economies. After a better-than-expected first quarter, the Chinese economy suffered a worse-than-expected April and May, with deteriorating Manufacturing PMI indicators. Then there is the US, which continues to levy tariffs of 25% on some $200 billion of imports from China despite the recent agreement. Many well-known economists, including Gita Gopinath, the International Monetary Fund’s Head of Research, believe much of the costs of those tariffs are being borne by either US businesses through lower margins or US consumers in the form of higher prices. Nevertheless, US PMIs remain resilient.
However, the other pressing question is about dents on the global economy. The US had threatened 25% tariffs on all Chinese imports if a quick deal wasn’t made - imposing 25% tariffs on all bilateral trade would no doubt lead to output declines for the world, as well as the possibility of a sharp correction or global equity market shock. We continue to focus on defensive stocks in this regard; for example, staying away from semiconductor stocks which are highly levered to the US-China trade war. Instead, we remain biased to the non-cyclical sectors, such as the Payments space, which is only in the US and Europe and much more insulated from the trade war tariffs. We also continue to hold a lot of gold companies as a safe haven.
From a country perspective, we believe a bigger drop in China’s exports to the US would still fall hard on Taiwan, South Korea and Malaysia which are all embedded in Asia’s export supply chain. According to the Organisation for Economic Development (OECD) in Paris, about 1.6% of Taiwan’s output is tied up in China’s exports to the US, with computers and electronics accounting for the largest share. For South Korea and Malaysia, those numbers are less but with the same industries in the cross hairs. If tariffs expand to cover all US-China trade, and markets slump in response, global GDP will suffer more dents across all sectors by 2021.
Source: Trading Economics data, 01/07/2019
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CLI01454 Expiry 30/09/2019