What to make of Trump’s latest tariff threats? – A view on Trump’s Trade War

Posted on: May 9th, 2019

Category: News

What to make of Trump’s latest tariff threats?

Stock markets around the world descended into a state of panic this week after Sino-US trade talks took a turn for the worst.

Hopes of the two sides striking an agreement anytime soon to end a convoluted trade war that has dragged out for the past year quickly faded after U.S. president Donald Trump issued a fresh round of tariff threats on Monday. Trump indicated that he will lift the 10% tariff rate that’s currently imposed on US$200 billion of Chinese imports to 25% on Friday as U.S. officials accused China of reneging on its promises. In response, China has threatened to back out of much anticipated trade talks that are scheduled for Friday.

Trump’s remark on Twitter is essentially the first canon that’s been fired after the US and China agreed to a truce last December. The truce and several rounds of trade talks over the past few months have helped to set a buoyant mood in stock markets on both sides of the Pacific as investors anticipated the inking of an agreement as soon as this Friday. The Shanghai Shenzhen Composite Index rallied more than 40% in the first quarter of this year, while the S&P500 Index ratcheted up yet another new high.

As the mood on stock markets swiftly soured on Monday, investors and analysts were left scrambling to figure what to make of Trump’s latest move. Some have been quick to slash what they believe is the probability of a deal being struck on Friday, while others interpret the latest turn of events as a negotiation tactic or political maneuvering by Trump.

Our view

We believe it’s more likely to be the former: a negotiation tactic similar to what Trump has employed in the past. The surprise new tariff threats came just days before a large delegation of Chinese officials led by Chinese Vice Premier Liu He is due to arrive in Washington. While China has threatened to walk away from the 11th round of trade talks that are supposed to happen on Friday, it is so far sticking to its itinerary. Vice Premier Liu He confirmed on Tuesday that he and his delegation will be traveling to the US on Thursday to continue trade negotiations.

While it remains to be seen if Trump will live up to his threats or how the 11th round of talks will play out, we believe there are some potential implications that investors should keep in mind. If Trump proceeds to levy a 25% tariff on all Chinese imports – and not just the US$200 billion that already carry a tariff – then the potential impact on 2019 Chinese GDP growth could be a decline of up to 0.85 percentage points (table below). This could spur China to further review its economic support policy. The probability of a full-blown trade war, however, still remains low as the impact on both the US and Chinese economies will be significant.

For instance, the China’s export to US has plummeted since late 2018 on the back of the tariff implemented:

While looking into the percentage share of the US imported goods from China, it ranges from 5-35% by the four tariff baskets (table below).  The tariffs would inevitably add inflation pressures to the already weakening US economy.

With that said, we expect both nations are motivated to strike a deal and the near term market volatility shall not be a major concern for long term investor in the Chinese equity markets.

Portfolio implications

Portfolio-wise, certain sectors tend to be more exposed to global trade and growth than others. These include technology, transportation, commodities and energy. Financial brokerage sector may also be pressured by the volatile stock markets. Our Premium portfolios, however, have been underweighting the above mentioned sectors.

On the other hand, our bottom-up stock selection have been focusing on domestically driven sectors such as consumption and healthcare where we found quality fundamentals and being more insulated from the global trade environment. These sectors have taken up 38.1% and 50.9% in Premium Asia Fund and Premium China Fund respectively.

Lastly we have minimal exposure to export oriented Chinese companies. In particular, both Premium Asia Fund and Premium China Fund’s top 10 holdings have minimal impact from the current trade discussion as illustrated in the tables below.  In Premium Asia Fund, our holdings in information technology sector are mainly Taiwan and South Korea companies, which the impact would be much indirect from this round of trade talk.

Outlook

Market sentiment has been shaken in the latest trade-talk development, especially after the year-to-date market rallies.  This could cause the spike in near term market volatility and drive the broad equity share prices.  We, however, have conducted vigorous studies on respective trade impacts to our portfolio holdings since the trade policy announced in 2Q last year, and we continue to closely monitor the development and literally how our holdings shall be valued.

Sector breakdown and top 10 holdings (as of end April)


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