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Tariff Troubles: Wealth Managers' Reactions

Editorial Staff, September 19, 2018

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The Trump administration is reportedly looking to crank up tariffs on China even further, raising concerns about the economic fallout across the globe. Here are reactions from a number of wealth management organizations.

US President Donald Trump plans to slap a new set of tariffs on China, targeting about $200 billion of the Asian country’s goods, media reports have said. Moves by the Trump administration to tighten trade controls on China, claiming that the country has violated Western intellectual property rights, have led to “tit-for-tat” tariff measures from China. Such an escalation typically happens in trade wars – which is one reason why economists and others have warned against protectionism. The specter of protectionism between the US and the world’s second-largest economy has hit economic sentiment, weighing on emerging market equities in parts of Asia, for example. 

What do wealth managers, economists and investment houses think of the latest moves? Here is a selection of comments.

Mark Haefele, global chief investment officer, UBS Global Wealth Management
The announcement is in line with our view that China-US trade tensions will get worse before they get better. An intensification of the US-China trade spat is a near-term negative for risky assets, raising the specter of an economically damaging trade war in which high tariffs are imposed on most or all US-China trade. That said, we think it is important that investors keep the announced tariff in context. 

While this is an escalation, the direct impact of the tariff announced today and the retaliation from China will only crimp US earnings by about 1 per cent annualized initially, according to our estimates. This would rise to 3 per cent at the start of the new year, when the tariff rate is scheduled to rise to 25%. Bear in mind that investors likely have been partially anticipating this action, considering the outperformance of defensive sectors over the last three months. We note the tariff's two-phase structure which means that the broader impact will only be felt by US consumers after mid-term elections.

Chinese equities (MSCI China) are already down by 18 per cent since early June. Including second-round effects, we estimate that the earnings impact on Asian equities (ex-Japan) to be just 2.5 per cent with the 10 per cent tariff rate, worsening to 4.8 per cent when the 25 per cent rate kicks in. We note that the MSCI China Index has around just 2 per cent revenue exposure to North America, and that China has already shifted its policy bias toward easing. We believe these tariffs are well priced into Chinese stocks. The yuan’s sharp depreciation against the US dollar, down by nearly 7 per cent since mid-June, has acted as a cushion for Chinese exports in US dollar terms. We see further yuan depreciation ahead, with a near-term USDCNY target of 7.0, and we do not rule out a further slide to 7.5 if trade tensions escalate further.

Attention will now turn to potential retaliatory measures from China, which has indicated that it would impose tariffs on $60 billion of Chinese imports from the US. A less-than-proportional round of retaliation would likely be taken positively by the market, reducing the risk of a significant tit-for-tat escalation in the conflict. In a positive risk case, a revised trade deal between the US and China could see upside for Chinese equities and for US equities. However, if China were to pursue significant non-tariff measures, the market would likely react more negatively.

Keith Wade, chief economist and strategist, Schroders
We are revising down our forecast for global growth for the second quarter running. For 2018 the forecast goes to 3.3 per cent from 3.4 per cent and in 2019 to 3 per cent from 3.2 per cent. The most significant changes are in Europe and Japan where growth has disappointed in the first half of 2018, but we have also nudged down our forecast for the US (by 0.1 per cent to 2.8 per cent). The emerging market forecasts are also slightly weaker this year and next led by a downgrade to our forecast for China in 2019 to 6.2 per cent (from 6.4 per cent). The downgrade is consistent with our view of a soft patch in the world economy in coming months and indicated by the weakness of industrial metals prices, our global activity indicator and the Purchasing Managers’ export orders survey.

Looking further out the downgrade for 2019 has been driven by our revised expectation of a deeper and more prolonged trade tension between the US and China. Recent comments from both sides suggest this will be a drawn-out affair and both global trade and capital investment spending will suffer from the uncertainty created.

Ronald CC Chan, chief investment officer, equities, Asia ex-Japan at Manulife Asset Management
As the US-China trade conflict progresses, it will inflict pain on both economies. The products included in the second round of US tariffs are broader and consumer-based, including everything from bicycle parts and baseball gloves to digital cameras. Market attention may currently be shifting away from China towards US markets, where many of the potential negative impacts of the tariffs do not appear to be priced in. These potential negatives include: narrower profit margins, rising wages and price inflation, and the consequences of a stronger dollar for US multi-national companies when they translate their overseas earnings back into US dollars.

China, Chris Towner, Director at JCRA, a financial risk management consultancy
Today’s announcement is a significant development in the ongoing trade wars between the US and the rest of the world and will affect around 6,000 items, representing the biggest round of US tariffs so far. China will undoubtedly retaliate and this could have significant impact not only on US companies, but more globally as well as higher prices which will affect global supply chains.

Businesses are understandably concerned about the impact of tariffs as they set budgets for the year ahead. We are certainly seeing an increase in firms looking to review their foreign exchange exposures and put together hedging strategies to help them cope with the volatility. In reaction to the trade disputes and follow-up actions, we have seen the Chinese yuan weaken by almost 10 per cent against the US dollar, since the outset of this year. This will act as a buffer for Chinese exporters dealing in the international markets. From a UK perspective, sterling is at its strongest level against the Chinese yuan since the EU referendum back in 2016, which will come as welcome relief to UK importers looking to hedge their products into 2019.

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