After a year of relative calm, Trump has started to act on his protectionist ideas. Although the risk of a trade war has risen, our global developed and emerging markets portfolios have little exposure to companies that would be affected directly.
After imposing sanctions on solar panel imports last year – mainly aimed at Chinese solar panel manufacturers, the Trump administration has recently announced a rise in tariffs on aluminum and steel imports. More recently, he signed a memorandum announcing a new set of trade actions, invoking Section 301 of the 1974 Trade Act. Trump directed the US trade representative to levy tariffs on about USD 50 billion worth of Chinese imports following a seven-month investigation into intellectual property theft, which has been a longstanding point of contention in US-China trade relations.
China reacted by announcing tariffs on USD 3 billion of imports from the US. In addition to the tariffs, the US plans to impose new investment restrictions, take action against China at the World Trade Organization and the Treasury Department will also propose measures. Before signing the measure, Trump lamented the US' multi-hundred billion dollar trade deficit with China and said the action would be “the first of many”.
Although so far the numbers are relatively small compared with the size of total trade, the actions by the Trump administration heighten the risk of retaliation by China and lead to increasing concerns about a global trade war that could destabilize the global economy. This would be a negative development for the US itself and its trading partners. As China is now specifically targeted, it would hurt them the most, together with other Asian exporting countries that are part of the China supply chain. For most Asian exporting countries, between 10% to 20% of exports is going to the US. We still have to see how this pans out. As China has indicated to be willing to open up the economy further and improve intellectual property protection, a trade deal remains a possible positive outcome. Still, risks have clearly increased.
We think that this will be an overhang for the global stock market for some time, even though the overall impact of the announced tariffs and measures on total trade between the US and China is relatively small. Clearly, Trump is signaling to the Chinese government – and to his constituents base - that he will do exactly as he promised on the campaign trail, so further measures cannot be ruled out.
Global Equity: little exposure
In our global high conviction strategy, we have little direct exposure to China, and few US companies with a lot of direct Chinese exposure. In the portfolio, we maintain a significant underweight in the US and an overweight position in Europe, for valuation reasons. For the long term, we actually think that Europe can benefit from increasing tensions between the US and China. However, in the shorter term, we think that increasing protectionism is negative for global trade, and will probably hurt everyone. As a consequence, this is clearly a negative for global markets, especially as it comes at a time of increasing global risks, due to the end of global monetary easing, and normalization of interest rates. Credit spreads are bound to rise, and the same holds for volatility, which is at all-time lows.
Emerging Markets Equity: few companies directly impacted
The impact on the emerging markets portfolios has been in line with the overall market movement. Only a few companies in the portfolio would be directly impacted to some degree by the announced measures. More important therefore is the overall impact on the economy and investor sentiment. For now, we believe that there are still large economic interests in the US and China that support open trade, so a further escalation into a trade war is not our base case scenario.