How Asia's CIOs view the US-China trade war
For Asian chief investment officers (CIOs), 2018 has been a far tougher year for investing than 2017. A combination of political and macroeconomic volatility contrasts starkly with the untrammeled market rises of last year.
Last year the S&P 500, the Dow Jones Industrial Average, Japan’s Nikkei 225, and Korea’s Kospi 200 all rose by over 20%, and MSCI’s Emerging Markets Index soared by 37.3%. Over the first seven months of this year, the S&P 500 returned just 6.6%; the Nikkei 225 dropped 2.05%, and the Kospi fell 11.14%.
It’s no longer so easy to make money. And that is causing asset owners some investing headaches.
“Beginning of this year, [the Public Officials Benefit Association] felt that the investment climate is totally different from last year, so as a whole we lowered our risk profile,” said Jang Dong-hun, chief investment officer for the Korean fund.
Indeed, investors have had to navigate levels of volatility that have spiked from unprecedentedly low levels. Last year the widely-used Cboe Volatility Index (Vix), which measures implied volatility in S&P 500 index options, averaged 11.01, the lowest yearly average since 2003. But it leapt to 37.32 on February 6 and has averaged 16.4 since, its highest level in three years.
This volatility partly resulted from central banks shifting from years of quantitative easing to tightening. But markets have also been roiled by the belligerent trade policies of US president Donald Trump. He has ordered the world’s largest economy to slap tariffs on the European Union, Canada, Mexico, and other countries – firing the opening shots in a trade war. The US and China have embarked on escalating threats and action since, unsettling global stock markets.
Amid an increasingly uncertain world, we asked regional investors and advisers about their key concerns, and how they are responding to them. Their top issue has been dominating financial headlines all year: trade wars.
TRADE FRICTIONS
Chuck Scully, chief investment officer for Asia at Metlife, was one of many CIOs to raise it as his chief worry: “The first [concern] that comes to mind is the global trade tensions in the world,” he told AsianInvestor.
The issue has been escalating since March, when the US implemented a worldwide 25% tariff on steel imports and a 10% tariff on aluminium imports. It originally exempted those from the EU, Canada, and Mexico, but removed these exemptions on June 1. This has triggered a raft of retaliatory tariffs on US exports.
Closer to home, China and the US have also been exchanging tariffs, the latest being a 25% tariff on $16 billion of Chinese imports, announced on August 7. This follows a 25% tariff on $34 billion of Chinese imports in July, and the US has announced plans for a 10% tariff on another $200 billion of Chinese imports.
The impact of current tariffs between the US and China will be relatively muted, but investors worry about the impact of the environment on market sentiment.
“It’s going to introduce market volatility [and] put uncertainty into the market, which is going to lead to volatile asset prices – we think that’s more a concern than the real impact on the economy,” said Scully.
Patrik Schowitz, global multi-asset strategist at JP Morgan Asset Management, echoed similar sentiments. Investors fear the trade war will crash confidence and cause companies to stop investing and consumers to rein in spending, he told AsianInvestor.
There are signs this may be taking place, despite the US economy reporting robust 4.1% growth in the second quarter of the year and soaring price-to-earnings ratios in the S&P 500. Risk assets in general have lost some momentum, with global equities experiencing a slight outflow of $3.6 billion in mid-August, according to data from Bank of America Merrill Lynch. US equities accounted for $2.6 billion of that total. The dislocation between US economic growth and stock market performance suggests a growing concern among investors.
“Trade is probably the number one reason why markets have been trading with so much difficulty, which to me certainly indicates that people have reduced their exposure to equities,” said Schowitz.
Australian superannuation funds are also concerned, but more over the impact of trade disagreements on the local economy.
“We rely quite a lot on exports and benefit from more freer trade, so the increasing moves around protectionism – that’s probably likely to have an impact on some of our markets, and potentially on our currency as well,” Kristian Fok, chief investment officer of Construction and Building Unions Superannuation (Cbus), told AsianInvestor.
Year to date the Australian dollar has dropped by about 10% against the dollar, slipping from A$0.81 to A$0.73, as of August 20. To defend against that depreciation, Fok noted that Cbus overweighted its position in overseas currencies. The superannuation fund also has an equities option programme that will trigger some protection in the event of a more than 10% fall in local equity markets, he noted.
WAITING GAME
Some asset owners aren’t convinced trade tensions require definitive action – yet.
“Trade friction issues … do not affect our asset allocation that much at this stage,” said Poba’s Jang
There’s no cause for worry unless the frictions continue on beyond the end of this year, he told AsianInvestor.
“At the moment we are in wait and watch mode and not looking to tilt our portfolio one way or another,” added Michael Frith, chief economist and chair of the investment committee for New Zealand Super Fund.
The overall concern among CIOs is that today’s bilateral trade tensions escalate into all-out protectionism across multiple countries. “That would be a very different situation compared to the US inflicting tariffs and China retaliating in a very direct way,” said Fok. “We’re looking for signs that it expands beyond that.”
Look out in the coming days for part two of this feature, which was adapted from the August/September 2018 edition of AsianInvestor.