hongkongen
What will get markets off their risk-off stance?

What will get markets off their risk-off stance?

30-07-2018 | Column

While most of the cards dealt are the same, fear has joined the players’ table. A quarter ago, we started to see signs of anxiety across global equity markets over President Trump’s trade war threats and a more hawkish Fed. Yet, fundamentals were still strong and earnings growth, with some small exceptions, remained solid. One quarter later, we have entered risk-off territory.

  • Fabiana Fedeli
    Fabiana
    Fedeli
    Global Head of Fundamental Equities, Portfolio Manager Emerging Markets

Speed read

  • Trade disputes increase volatility in developed markets
  • In emerging markets sentiment has weakened
  • The main question to ask is what will happen with the trade disputes

We are seeing all the obvious signs of risk aversion: developed markets are back to outperforming emerging markets and in developed markets, the US reigns supreme. Needless to say, in equity markets quality is outperforming value.

So, what has changed? Well, not really much from a fundamental viewpoint: the global growth cycle is still improving, earnings are still growing nicely (expectations for both developed and emerging markets are around 15% for the year), and even trade numbers are still robust. Yet, while most of the cards dealt are the same, fear has joined the players’ table.

A perfect storm of potential threats

Don’t get me wrong, markets have good reasons to be fearful. A perfect storm of potential threats has appeared on the horizon: a more hawkish Fed, protracted trade hostilities and geopolitical concerns (particularly in emerging markets and Europe). None of these threats per se could halt the global growth cycle but, put together and pushed to their limits, they could be powerful gamechangers. A strong dollar, collapsing currencies in countries with widening current account deficits and a weak credit profile, as well as Purchasing Managers’ Indices starting to roll over are a symptom rather than a cause of those same fears.

Let’s not forget that a Fed tightening cycle has not per se been negative for equity markets, as long as it responds to improvements in the global economy (think 2004-06). However, a steeper tightening path to stem inflationary pressures that are not accompanied by an improved growth outlook, is likely to have a negative impact. So the key issue becomes that, if the current trade disputes erupt into a full-fledged trade war, we are left with inflation-led tightening in the US at the same time as the global growth cycle taking a turn for the worst.

The main question to ask is what will happen with the trade disputes, particularly between China and the US. We just saw the first tariff increases on USD 34 billion of imported goods being implemented on both sides. This has little impact on either country from a fundamental viewpoint, representing less than 0.3% of China’s current GDP and easily offset by stimulus. Another USD 16 billion is in the cards and will likely be implemented soon. Still, these are small numbers. What happens next is key. In our opinion, as the stakes at risk are high for both countries, negotiations are likely, but the process will not be straightforward. Both President Xi and President Trump are likely to maintain a tough stance: Xi to push through tough reforms and Trump to help his party win the mid-term elections.

What happens if we are wrong? What happens if negotiations don’t succeed and Trump pushes through tariff increases on another USD 200 billion of Chinese imports? And then maybe China retaliates with measures against US companies investing in the country? As we discussed in our last Fundamental Equities Quarterly, we have to be mindful of the risks, and should all negotiations fail, and a full-fledged trading war break out, equity markets would face the proverbial double whammy. On the one end, earnings might be hit as both exporters and importers, depending on what side of the trade tariffs they sit, suffer. On the other end, we could expect inflationary pressures to ramp up in the US, prompting the Fed to hike rates not in line with the improvement in economic growth (as it has done thus far) but to stem inflation.

Either the trade war happens or it doesn’t

The outcome will be, as it often is, binary. The trade war either happens or it doesn’t. With current sentiment, positive news on the trade disputes could ignite a rally. How long that will take, and the volatility that we will have to endure in the meanwhile, will have to be weighed against our risk budgets. For developed markets, we have become less upbeat. Unless we get positive news on the trade disputes, volatility is likely to stay high, as the market is discounting increasing risks of escalation at the same time as we expect declining Central Bank support.

In emerging markets, sentiment has weakened. There have been outflows since May and emerging bond spreads have been widening. Most global investors will now take a wait-and-see approach to see what happens on the trade side and on emerging currency volatility.

Make no mistake, even if China and the US come to an agreement on their trade disputes, the two countries are likely to be at odds for the years to come. The political and economic relationship between China and the US has changed dramatically, and any expectation of the two becoming BFFs over the next ten years would be unrealistic.

Get used to the US and China being at odds

When on 24 May 2000, the US House of Representatives voted to award China permanent normal trade relations (effectively backing Beijing’s bid to join the World Trade Organization), frankly, they didn’t know what was coming. At the time, the US political elites held the view that as long as China integrated more into the world trade system, its economy would become more market-oriented, implying that state control would reduce, and ideologically China would draw closer to the western world. Instead, the consolidation of power by President Xi has shown that while the might of China’s size and power in the world has increased, its ideology has not drawn closer to that of the US and is not showing signs of doing so. The Belt and Road and Made in China 2025 strategies are perceived by the US as China challenging the established world economic and political order. Therefore, the issues between the two countries will not end with negotiations on the current trade frictions but are likely to resurface from time to time under different disguises, when not on trade, on investments, maybe on technology, why not on politics and let’s not forget currency.

Yet, what we need now is a resolution of the trade tensions for global markets to get off their risk-off stance. For the US-China relations, one can never tell what the future holds, but my guess is that eventually markets will get used to the two most powerful countries in the world being at odds from time to time, and, depending on the battle, will be choosing the winner.

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Subjects related to this article are:

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree