Investing outlook as U.S.-China trade tensions continue

As global trade tensions continue to take centre stage, there are three events to monitor when it comes to U.S.-China relations, in particular.

In a PineBridge Investments post, economist Paul Hsiao says the first event is the comment period for U.S. tariff-related public hearings (ending Sept. 5).

His base case is for the hearings to have little effect, with the U.S. imposing a 25% tariff rate on a total of $200 billion of Chinese goods. (Currently in effect is a 25% tariff rate on $50 billion of Chinese goods, plus tariffs of 25% and 10%, respectively, on steel and aluminum imports to the U.S.)

“So far, our estimates point toward a drag of around 30-50 basis points on real Chinese GDP growth over the next 12 months,” says Hsiao, adding that that figure could double if the 25% tariff is implemented across the full $200 billion of Chinese goods.

A second event is U.S. midterm elections (Nov. 5), which, historically, tend to “erode the incumbent majorities in the House and Senate, which would put more political pressure on the president,” says Hsiao.

Third is the Asia-Pacific Economic Cooperation meeting Nov. 12-18, which the U.S. and Chinese presidents are scheduled to attend.

Going forward, there could be greater leeway for the U.S. and China to strike a deal, says Hsiao. For example, with no major U.S. election in 2019, political pressure on Trump’s administration to maintain its protectionist stance could ease.

Further, Hsiao expects slower growth in both China and the U.S. in 2019, which could lead to a positive trade outcome.

“The harsh reality of slowing economies could be the catalyst for conciliation on both sides,” he says.

How to invest in China

In a Matthews Asia article posted in June, experts downplayed the impact of tariffs from an investment perspective—even if the trade war escalates beyond the initial $50 billion of Chinese goods.

In that case, “the damage to the Chinese economy and the investment environment will be much less than many expect, because the U.S. accounts for a small share of total Chinese exports and because China is no longer an export-driven economy,” says investment strategist Andy Rothman in the article.

Likewise, portfolio manager Sherwood Zhang says in the article, “As portfolio managers, we have long been positioning for growth in consumer-related industries, including financials, healthcare and consumer staples.”

He increased defensiveness in his dividend strategy portfolio by increasing the weight of high dividend-yielding stock with stable underlying cash flow to balance the portfolio’s exposure to dividend growth names. “Any sell-off would increase the attractiveness of companies that can sustain and grow their earnings and dividends in this environment,” he says.

Portfolio manager Tiffany Hsiao says in the article that her small companies strategy seeks “innovative and capital-efficient small companies that are relatively insulated from macroeconomic uncertainties.” That includes an investment approach that focuses on the needs and wants of domestic Chinese consumers, she says.

She also considers long-term growth opportunities indicated by China’s strategic priorities for fostering home-grown industries. “China is taking aggressive steps to build its own semiconductor ecosystem, a long-term economic development goal that is likely to continue with or without a trade war,” she says.

Portfolio manager Andrew Mattock says his portfolio holdings remain largely unaffected since his team focuses on China’s domestic consumption and expanding middle class.

Still, a full-blown trade war would be detrimental to both China and the U.S. and the global economy, since China is “part of a global manufacturing supply chain that produces jobs worldwide,” he says. In such a case, the impact on global businesses and consumers would need to be re-evaluated.

For full details, read the post from PineBridge Investments and the article from Matthews Asia.

Also read:

Many Americans doubt effectiveness of tax cuts, tariffs: poll

Economic impact of China’s environmental strategy

How U.S. dollar, trade talks are affecting currencies