Growing trade frictions threaten Asian equities outlook

A trade tariff plan prescribed by US President Donald Trump could potentially lead to a tit-for-tat retaliation by nations around the world, hurting global growth and damaging the prospects for Asian equities, according to market strategies and wealth experts.

On March 8, Trump signed executive orders to impose tariffs on steel and aluminium, with a 25% tariff on all steel imports and a 10% tariff on all aluminium imports globally, with the exception of Canada and Mexico.

Taken in conjunction with the January tariffs on washing machines and solar panels, and the resignation of Gary Cohn, the chief economic adviser to the White House—a key supporter of free trade policies within the administration—on March 6, they portend an ominous trend for nations trading with the US, experts said.

“This is bad. With Cohn’s departure, America's international economic policy will be increasingly influenced by trade and national security hawks, which means that American protectionism could become more serious going forward, especially if the new economic adviser is not like Cohn,” Hong Kong-based Chi Lo, senior economist at BNP Paribas Asset Management, told AsianInvestor.

“The direction points to more tariffs and quotas on American imports of various types of goods and services from other countries, and notably China,” he added.

ASIA AT RISK

Asian markets are especially vulnerable because of their heavy reliance on export-oriented growth, according to investment experts.

James Cheo, investment strategist at Bank of Singapore, believes Asia is definitely vulnerable to an environment of increasing trade disputes. In the event that trade frictions escalate, all Asian equity markets will be affected, he told AsianInvestor.

That would be bad news for regional institutional and retail investors, which typically have sizeable weightings in their local or regional stock markets. 

It would also mark a big turnaround from last year. Asian markets had a banner year in 2017, as the MSCI Asia index posted returns of around 33% in 2017, with market analysts expecting Asian equities to show strong growth in 2018 as well.

However,the Hang Seng Index fell by nearly 4% in four days after Trump's initial announcement of his plan to implement the tariffs on March 1, while Japan's Nikkei 225 benchmark index dropped by around 3% over the same period.

"The drop was because of the fear about potential or escalating trade wars throughout the world, not just with China or certain countries," BNP's Lo said.

A BNP Paribas Asset Management report released on February 23 said that six out of the top 10 countries with the highest exposure risk to escalating US protectionism are in Asia, including Vietnam, Taiwan, Malaysia, Thailand, Singapore and Korea, based on percentage of GDP tied to US exports.

The report identified Vietnamese textiles, leather, and footwear, Taiwanese and Malaysian computers and electronics, and Singaporean petroleum products to be the industries that are the most at risk within Asia to US trade measures.

BROAD IMPACT

“Assuming there will be more tariffs coming, there will be a broad impact on Asian economies because they are part of the global supply chain, in particular China,” Lo noted.

The BNP Paribas AM report noted that export exposure to the US by the top six Asian countries report ranged from around 9% of GDP for Korea to around 20% of GDP for Vietnam, as of 2016.

Tuan Huynh, chief investment officer for Asia Pacific at Deutsche Bank Wealth Management, told AsianInvestor that there is some concern that the US administration could impose tariffs on Chinese IT equipment such as handsets and computers.

China is not likely to retailate strongly but it could take action by reducing the purchase of US-based software and financial services by Chinese state-owned firms, as well as slowing down the opening of its services sector, he added.

North Asian markets are more exposed to global trade so they might face more pressure compared with Southeast Asia, which have more of a focus on their own domestic markets, Cheo said. "The countries that would be less impacted would be the more domestically-oriented countries such as Indonesia, Philippines, and India," he added.

The impact of broader tariffs would be very negative if it extends beyond the currently announced goods, which seems to be increasingly the case, Alicia Garcia Herrero, chief economist for Apac at Natixis, told AsianInvestor.

All of this is likely to give growing cause for concern to Asia's institutional investors, who believe emerging Asia offered the best investment opportunities for 2018, as AsianInvestor reported recently.

TIT FOR TAT

The real danger will be that other countries impose their own tariffs on US imports, potentially causing a broader trade war and and disrupting this period of synchronised global growth, Catherine Yeung, investment director at Fidelity International, told AsianInvestor.

“The risk for growing trade frictions through tit-for-tat retaliation that will be implemented by Asian governments against the US is rising,” said Lo.

Such a robust response by one or more of the US’s trade partners could have a negative impact on Asian markets in particular, Johan Jooste, chief investment officer at the Bank of Singapore, said in a March 7 report.

“This would spark a strong response by the US in turn, followed by additional rounds of retaliation,” he said. “The prime loser will be Asia.”

For now, however, Asian markets seem relatively unaffected by the latest tariffs on steel and aluminium imports.

“It’s a fairly limited impact given the small export volumes that Asia has to the US,” FIL’s Yeung noted, pointing out that in 2017, just 4% of Korean steel production, 2% of Japanese, less than 1% of Indian, and 0.1% of Chinese steel was exported to the US.

Nevertheless, investors will wait with bated breath to watch what happens next.