Kelly Chung, senior fund manager at Value Partners, told our sister publication Fund Selector Asia that the negative impact from the US-China trade conflict will slowly surface during the period leading up to the first quarter 2019, and the market should expect some “downside surprises” in the upcoming corporate earnings report.
“The conflicts will certainly translate into downward pressure for China’s economic growth and company fundamentals,” she said. “The market has been pricing in such consequences but they are not fully reflected yet.”
She is then avoiding some sectors that are markedly sensitive to trade and technology in her firm’s $56.5m (£43.3m, €49.2m) income strategy. The industries are namely hardware makers, exporters and companies that are highly dependent on raw materials or inputs from the US.
“We are cautious about the actions subsequent to the announced tariffs. The event that worries us the most is a potential spillover to a technology know-how blockage between the two countries.”
A US pullback from China’s supply chains would have profound implications not only for China, but for some key emerging market industries
“It is especially difficult for China to compromise [in trade negotiations] while it is preparing for the strategic programme of ‘Made in China 2025’,” said Chung. The plan, initiated by Chinese officials in 2015, aims to lessen the country’s reliance on imported technology by developing its own.
China supply chain threat
China’s “no-backing down” attitude against the US may imply some investment opportunities elsewhere. “It may create market share opportunities for Korean and Taiwanese companies at the expense of Chinese ones,” according to James Syme, senior fund manager at JO Hambro Capital Management Group, writing in a client note.
Syme, who manages the firm’s emerging market equity fund, said that recent allegations about Chinese intelligence agencies hiding sophisticated computer chips in computer servers being exported to the US is potentially the real reason behind the trade dispute.
If the allegations are true, the issue comes under US national security.
“[T]his significantly increases the likelihood that the US seeks to disentangle some of its supply chains from China, not to improve the trade balance, but as a fundamental matter of national security.
“This would have profound implications not only for China, but also for some key emerging market industries.”
“It is also likely to see continued weakness in the Chinese renminbi in response to diminished export opportunities, and will not be supportive of Chinese equities.”
Union Bancaire Privee’s (UBP) told FSA that so far, the belief is that Chinese officials can manage the risk of a trade war.
“We think China has enough policy tools to be able to stabilise the economy above the 6% growth level,” said Norman Villamin, UBP’s chief investment officer, adding that these include cutting the reserves requirement ratio and devaluing the renminbi against the US dollar.
Nonetheless, UBP’s current base-case scenario forecasts a reduction in China’s economic growth by 0.8% to 6% in one year.
He said the worst-case scenario for an escalated trade conflict is that the GDP growth in China drops to 5.5%.
He added that it is unlikely China will back down or admit defeat in the trade war, making continued retaliation possible.
