Trade war could be a buying opportunity for emerging market stocks
Escalating trade threats between the U.S. and China, the world’s two biggest economies, are creating opportunities to buy emerging-market assets, according to some of the world’s largest money managers.
After the Trump administration proposed tariffs on 1,300 Chinese goods, Beijing responded with a counter-punch: an additional 25 per cent levy on about US$50 billion of U.S. imports including soybeans, automobiles and aircraft. That sent emerging-market currencies down the most in nearly two months, while developing-nation stocks fell to their lowest since early February.
Simon Smiles, chief investment officer at UBS Wealth Management for ultra-high-net-worth clients, said the potential market overreaction gives further reason for money managers to buy into weakness.
“We’re all-in, in terms of the growth impulse, in terms of the relative valuations and that’s against a backdrop of being constructive on risk assets more broadly,” he said on Bloomberg TV, adding that UBS is overweight emerging-market equities and hard-currency debt.
Here’s what other money managers and strategists had to say:
Gene Frieda, global strategist at Pacific Investment Management Co.:
“The market reaction is confused, reflecting the fact that it has no historical narrative on which to fall back. Today’s Chinese actions were not surprising, but the market response shows how confidence has been diminishing.” “You cannot separate tweets against tech firms from tariff actions against China. This is a material change relative to the first quarter, when the market was bulletproof to bad news.”
Frieda said most probable scenario is a negotiated settlement before the first round of tariffs kick in on both sides.
Anders Faergemann, senior fund manager at PineBridge Investments in London:
Increased tensions may actually benefit emerging-market assets as markets could dial down their optimistic view of global synchronized growth and ultimately global yields will come down. That would add to the return outlook for spread products such as EM, he said “Valuations have already adjusted sufficiently to compensate for the increased equity volatility and EM spreads are better value now” “As long as China’s retaliation to the U.S. provocation remains within reason, which is our base case, fixed income should benefit and the appeal of EM remains strong and it stands to benefit from investors returning to a 2017 frame of mind.”
Faergemann favors the Mexican and Colombian pesos in this scenario as markets seem to be overestimating political risk associated with their upcoming elections
Anastasia Levashova, a fund manager at Blackfriars Asset Management in London:
A trade war will have a mixed impact on EM countries as China buying less soy, avocados and wine from the U.S. means they’ll buy more from developing nations. On the other hand, no one knows where it will escalate, she said. More important indicator of direct competition between the U.S. and China was the launch of renminbi crude oil futures, a clear trend of strengthening their own currency and trade balance
Kathy Jones, chief fixed-income strategist at Charles Schwab:
“It looks like a mixed bag for EM. On the one hand, it could benefit agricultural producers like Brazil and Argentina, but I doubt that is enough to offset the concerns about slowing global growth and protectionism”
Sebastien Barbe, head of emerging-market research and strategy at Credit Agricole CIB
“It fuels the risk of a trade war, but we are not there yet. China has intensified its rhetoric, but I think we are still in a hard negotiation.”
If risks continue to intensify, Asian currencies would probably be most affected as some countries would be hit given supply chains and considering economies are more open to trade than other developing regions.