Five investment themes for 2019 and beyond
2019 has been an interesting year so far. Global stock markets started January in the doldrums, only...
Back in May global stock markets had another wobble – and as ever the worry started after a tweet: US-China trade negotiations were not going well. Additional US tariffs were applied to Chinese goods, China retaliated with higher tariffs on US goods, Huawei was blacklisted and discussions were put on hold until the G-20 meeting at the end of June.
Even if an agreement is reached, China may wonder if it is worth the paper it is printed on: despite coming to a trade agreement with Canada and Mexico, the latter was still hit with more tariffs: 5% incremental increases a month up to 25%. Then there’s the preparation for US-EU trade talks which has begun…
Here, three professional investors give their views on the impact of ongoing trade wars.
“It is hard to gauge just how far President Trump wants to push this dispute. Tariffs, and the threat of them, gives him powerful leverage in the short term [as he heads into an election campaign] but it is clear this comes at an economic cost.
“Recent calculations of the impact of tariffs on households do not make for happy reading. If tariffs are imposed on another $300 billion of Chinese goods, that will lift the household cost in the US from $831 to $2,294 (for a family of four) according to a business group coalition ‘Tariffs hurt the Heartland’. Further, Gary Hofbauer at the Peterson Institute for International Economics calculates that if 25% tariffs are reached on Mexican goods, then households will bear an incremental $1,700 cost. If all this plays out, and if these numbers are correct, then US households could find themselves $930 better off in taxes and $3,994 worse off in indirect costs through tariffs – net $3,014 worse off. That, or anything approximating it, is not an election winner.
“Will Trump make a deal? Or will he overplay his hand? The US economy is already looking less buoyant and the Federal Reserve appears to be leaning toward an interest rate cut. Markets may yet force the issue.”
“The impact on stocks was heaviest on those with most China-related exposure. On a country basis, China and Korea were the most affected, but so too was Singapore. The immediate thought is to look at those most exposed to trade, but the widening use of tariffs as a diplomatic weapon soon begins to be felt on a global basis as trade, then investment plans and then wage growth all begin to slow.
“So we expect markets will continue to be pushed and pulled. We feel confident enough to look through recent events. Without wishing to sound glib or complacent, Asia is still a growing manufacturing centre with labour, capital, infrastructure and supply networks all in place that suggest this is not going to knock Asia off course. There may be disruptions and supply chains within the region may have to be reorganised, which will take time but will happen. We believe that domestic consumption growth in the region may be slower than it would otherwise be, but it will still probably grow faster than in developed markets.”
“The US-China trade war has escalated dramatically. Just a few weeks ago, we were predicting a fairly quick resolution, possibly in June. Recent events have changed our thinking. We still believe both sides can strike a deal – but the path to that accord now looks far more protracted and challenging. There’s also a danger the situation could escalate further.
“The longer this drags on, the more nervous investors and companies will become. We could see some pullback in capital expenditure in the technology sector. The recent upheaval has affected our global emerging markets portfolio. Stocks of note are Samsung Electronics and Taiwan Semiconductor Manufacturing Co (TSMC), which we have held for 17 and 14 years respectively. Both their share prices fell in response to Trump’s announcement, illustrating the complexity and interconnectedness of the tech sector. This also demonstrates how sweeping changes can disrupt business. Nonetheless, both firms have solid economic moats and increasing barriers to entry. They are also positioned to benefit from the structural growth of computing power. This includes AI, data centres, autonomous driving, high-powered computing and 5G.
“That is not to diminish the current challenges the companies face. Samsung was expected to increase market share in the wake of 5G. This could now be disrupted. Demand for memory chips will also slow in the second half of 2019. This is because Huawei stockpiled chips in the first half in expectation of the ban, artificially inflating demand. But there are positives. Samsung is a competitor to Huawei in the handset space. It should grow sales as a result of the latter’s ban. This is particularly true in Europe, where Huawei had caught up on Samsung in recent years.
“For TSMC, the biggest medium-term threat is that a regulatory crackdown prevents it from supplying Huawei. Trade-war-related restrictions on iPhones in China could further hurt the group. However, this is counterbalanced by potential domestic gains for Huawei as nationalistic sentiment among Chinese consumers rises.
“As it stands, more will become clear after the G20 summit at the end of June. Trump has already threatened a new round of tariffs if President Xi Jinping refuses to meet him to discuss trade. Investors have buckled up for further bouts of volatility. Many have bought risk protection in preparation for any fallout.
“Despite all this, we still think a deal remains the most likely outcome. Both sides have too much to lose. What could break the deadlock? Heightened market stress incentivised negotiators to seek common ground last time tempers flared. Similar upheaval could once again spur them to seek a deal.
“The issue here is twofold: first, the impact on sentiment, mostly corporate investment, is far greater in both the U.S. and China than in reality. That means that actual effects are borne by the economy and reflected in the market to a much greater extent than are warranted, giving rise to opportunity.
“Second, the fear that the tariffs may signal something more than the current dispute – a full blown trade war that could rip apart supply chains and undermine the global economy. This is far more serious, but yet not enough to derail domestic economies. It could lead to a dismantling of the U.S.’s international influence and signal the rise of China and a different kind of world order. But this is something that I suspect neither the U.S. nor China is ready for and they are unlikely to accept.
“So the likelihood remains that a trade deal is done, albeit one that doesn’t clear up the fundamental tension between the two powers and doesn’t remove the incentives for China to continue to expand its economic sphere of influence and expansion of manufacturing supply chains into Southeast Asia and even further afield.
“In addition, the average opinion in the market seems to be focused on the short run. And is also taking it for granted that U.S. policy alone drives Asia’s economies. That is surely short-sighted! Not only do Asia’s governments have the room to manoeuver in terms of macroeconomic policy, but Asia’s businesses also have the ability to sidestep a lot of these trade issues by changing their supply chains. None of this is without cost; nor can it be implemented immediately. Markets seem determined, however, to view a stand-off between the U.S. and China as a short term, zero-sum game. In so doing, they are agreeing with the rhetoric of the U.S. administration.