now loading...
Wealth Asia Connect Middle East Treasury & Capital Markets Europe ESG Forum TechTalk
Wealth Management
Why a trade war may be good for bond investors in China
Reduced tightening or short-term monetary / fiscal easing possible
Bayani S Cruz 21 Jun 2018

For fixed-income investors, the uncertainties over a looming trade war between the US and China can be seen as a buying opportunity rather than a cause for alarm. The same cannot be said for equity investors since global stock markets have not performed as strongly in recent weeks as they did in 2017. This is partly in reaction to the on-going tensions and uncertainties arising mainly from President Trump's harsh rhetoric.

"For the moment, we are focusing on our highest-conviction names, evaluating how vulnerable they might be to any probable tariffs but more closely eyeing the more attractive valuations we are seeing today, especially on the investment grade side," says Eric Wong, fixed income portfolio manager, Fidelity International. The real impact that investors need to consider is how the tariffs will affect individual companies in China as policymakers are likely to find it more difficult to continue deleveraging and impose other tightening measures under the current environment. "We could see this step backward on the fixed income side through reduced tightening or even short-term monetary or fiscal easing, both of which would be positive for bond prices," adds Wong.

On the other hand, the performance of global equities since steel and aluminium tariffs were announced suggests only limited concern about trade tensions, with the global index rising higher. "However, compared with performance in 2017, gains this year have generally been mediocre, and much more volatile. Markets are perhaps not yet convinced that a trade war is inevitable, but they are equally uncertain that it can be avoided," says Craig Botham, emerging market economist, Schroders. Botham explains that multiple factors are at work, including weakness in Chinese markets which are also driven by tighter credit conditions and concerns over slower growth. "There have also been doubts over the pace of global expansion which have weighed on equity sentiment. Nonetheless, trade concerns do seem to be taking some toll. For now, the market seems to be betting that a trade war between China and the US can be avoided, but a glance at the Mexican stock exchange tells us that trade tensions can take a real toll when they intensify," Botham warns.

For equity investors, this means the negative impact will increase if the US imposes tariffs on US$450 billion of China imports. "With US growth now accelerating after a tepid first quarter and global growth still above the long-term trend, we expect global equities to continue to grind higher. But investors should monitor the situation carefully as the timing of additional actions is uncertain, which can increase volatility," according to the latest CIO note of UBS Global Management Chief Investment Office.

This sentiment is echoed by Rick Lacaille, global chief investment officer of State Street Global Advisors. "Investors will need to look more carefully at pockets of opportunity. The biggest downside risk remains protectionism as trade battles move beyond rhetoric to retaliatory tariffs. Therefore, a more selective, defensive approach is recommended for the remainder of 2018," he says.

Conversation
Charles Yang
Charles Yang
vice president
CCXAP
- JOINED THE EVENT -
17th Asia Bond Markets Summit
Resilience in an age of uncertainty
View Highlights
Conversation
Edwin Gutierrez
Edwin Gutierrez
head of emerging market sovereign debt
abrdn
- JOINED THE EVENT -
18th Asia Bond Markets Summit - Europe Edition
Taking advantage of the great bond re-set
View Highlights