Trade Dispute Has Not Shaken Our Confidence in Equities
The impact on global growth will likely be very small, if tariffs are even implemented. We remain positive on equities, despite trade disputes.
The announcement on US and Chinese tariffs has exacerbated fears of a trade war, leading risk markets lower. However, the impact on global growth and inflation will likely be very small, if tariffs are even implemented. Negotiation will now proceed, and while we are carefully assessing the risks of escalation, we remain comfortable with our investment strategy, including our positive view on equities.
Equity markets took another leg lower after the USA published a list of USD 50 bn worth of Chinese imports on which tariffs could be imposed and China responded with a commensurate USD 50 bn announcement, including some high profile US goods like soybeans, autos and aircraft.
While the trade issue is certainly a legitimate concern, the news should also not have come as too much of a surprise. These tariffs will not go into effect immediately, and it will likely be a few months before anything happens.
Fair and Reciprocal Trade Will Continue to Be in Focus in International Politics
More broadly, we believe the concept of fair and reciprocal trade will continue to be in focus in international politics for the foreseeable future, leading trade relationships to be reviewed and renegotiated and raising political uncertainty during these negotiations. Yet importantly, while we have moved to and are likely to stay in a regime of higher volatility than over the last five years, we do not have grounds so far to revise our global growth or inflation forecasts in a significant way. The USD 50 bn of imports these tariffs cover represents less than half a percent of GDP for China and less than a quarter percent for the USA. Thus the market impact should be limited, and we tend to view weakness in prices of risky assets as a buying opportunity. This is our base case and the first of two scenarios we have identified to help monitor how the situation is likely to evolve. This is not to say there will not be a meaningful impact on individual companies or perhaps even sectors, but in our base case we do not expect any sustained contagion from micro to macro.
The second scenario or risk case is one where negotiations start to break down, rhetoric turns more confrontational and countries engage in tit-for-tat retaliation, leading business and consumer confidence to suffer, global growth expectations to be revised significantly lower and inflation expectations to rise. This would likely lead to a more persistent and deeper risk-off regime in financial markets.
Looking Beyond the Headlines and Rhetoric
In order to assess whether we remain in scenario one or whether the risks are rising that we are moving toward scenario two, it is important to distinguish headlines and political posturing from the underlying reality. We view the current assertive rhetoric largely as a negotiating tactic or a political statement. Trade negotiations, rather than headlines, have been moving in a positive direction, as shown by the progression of NAFTA discussions. Additionally, comments by senior US and Chinese officials have largely been positive.
Retaining Positive View on Equities
Overall, while trade disputes are a risk to our investment strategy, we are monitoring the situation closely and continue to believe that much of the worrisome rhetoric we are hearing is negotiating tactics and/or political in nature, aimed at firming up popular support for a renegotiation of trade relationships. However, we do not believe that either side wants a trade war, and we view progress to date as fairly positive, with NAFTA a case in point. Nevertheless, we are continuing to carefully assess all relevant market drivers with a view to our tactical positioning, which remains unchanged at present. Positions like our long Japanese yen and inflation-linked bonds are useful portfolio diversifiers to our positive stance on global equities.