Experts identify winners and losers from long trade war

With heightening trade tensions between the US and China increasingly likely to last for some time, prudent Asian investors should consider cutting back on public equities and targeting particular areas and countries that could benefit, say industry watchers and research heads.

Regional equity markets continue to languish in negative territory for the year and asset owners  spoken to by AsianInvestor have said they are reducing their exposure to global public markets amid the uncertainty.

The volatility stems from the stand-off on trade tariffs between the US administration and China, while led to the US raising tariffs on $200 billion of Chinese exports from 10% to 25%, and caused Beijing to retaliate on $60 billion of imports from the US.

President Xi Jinping has stated that China should be prepared to become increasing self-sufficient in the face of the US trade ban on its leading mobile firm Huawei Technologies – which was just one blow in the escalating trade war between the two.

Francois Perrin, a senior portfolio manager with Hong Kong-based firm East Capital, told AsianInvestor the US's ban on companies dealing with Huawei has ramifications well beyond the telecom company itself.

"It has massive implications across the entire tech value chain, and across Asia. A number of suppliers to Huawei will have to revisit their growth outlook, because Huawei was a sizeable client for them."

Perrin was in Taiwan last week and said, "I had a chance to touch base with a number of tech companies on their ability to continue to supply Huawei against a strong US embargo. They will try, but it’s obvious the US is putting a lot of pressure across all of Asia to enforce the ban on supplying Huawei."

Jang Dong-hun, Poba

KOREAN FALLOUT

US lobbying is also intensifying in Korea, where the US government is about to impose more restrictions on exports of hi-tech goods to China, and the Commerce Department is tightening regulations for American companies exporting certain types of goods for civilian and military use.

They are also lobbying telecommunication companies such as LG to stop providing materials and equipment to Huawei.

Jang Dong-Hun, chief investment officer at the Korean Public Officials Benefit Association (Poba) told AsianInvestor, that local companies are being cautious. “Most are waiting to see what the effect of these sanctions will be. There are some pros and cons to the situation, but mainly it’s a negative outcome that is expected.

Samsung Electronics is a key example. Its semiconductor business could suffer as Huawei orders fewer chips, but its mobile phone sales could rise as other countries turn away from Huawei handsets, Jang noted.

Chart: Key stock market performance

Poba itself has prepared for more volatility, cutting back its public equities exposure from 15.2% at the end of 2018. “During the first quarter, Korean equities and global equities had outperformed based on our assumptions about this year, so we lowered our exposure in the second quarter,” he told AsianInvestor.  

However, Poba could cut its public equities figure further if global markets remain volatile and a resolution of the trade war doesn’t emerge in the second quarter, he added.

WINNERS AND LOSERS

It’s quite possible that conditions will worsen. There’s no plan for further trade talks between the US and China before the G20 meeting scheduled for the end of June. If that multilateral meeting doesn’t yield results (and US president Donald Trump doesn’t typically enjoy such international forums) it could harden positions and cause tensions to last into 2020.

“If there isn’t a positive outcome from the G20, we may go into a sharp correction,” said Perrin. “This is the type of scenario that currently has to be taken into account when looking at positioning for the second half of the year. It has implications for positioning on the outlook for growth, and not just across emerging markets, but globally."

Some Asian countries will suffer from the protracted dispute. “The pressure is mainly exercised on the most tech-oriented export countries across Asia. The growth outlook for those countries – China, Taiwan, Korea, will remain weak,” said Perrin.

However, Southeast Asian countries and India are less impacted by the trade war. Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis reckons they could potentially capture some of China’s labour-intensive and even medium-tech manufacturing.

"Vietnam and India will benefit most from the cost-arbitrage out of China’s rising costs. Despite its favourable demographic trends, the Philippines will gain the least due to relatively expensive electricity and weak business infrastructure. In contrast, Thailand tops the rankings for higher value manufacturing, thanks to both excellent hard and soft infrastructure, mitigating some of the negative impact of worsening demographics," said Garcia Herrero.

Meanwhile, protracted tariffs and bans are likely to force China to redouble its efforts to create its own technology substitutes.

Timothy Tsui, director of Hong Kong based family office Arbutus told AsianInvestor, said a lengthy trade war would force Huawei and other companies to develop their own systems and applications. "The good news for China is that it can move faster than the US on (IP and product) approvals,” said Tsui.

His advice to institutional investors looking to react to the trade war? Focus more on private technology investments – fintech and healthcare tech in particular.