Market Views: Who will be the winners from the US-China trade war?
TINA or "there is no alternative" may help China stave off US president Donald Trump's attempts to undermine the factory-capital of the world.
That is despite well-deserved scepticism surrounding Trump's revelation on Monday (August 26) that officials in Beijing reached out to US trade officials seeking to return to the negotiating table.
These sort of positive noises have been followed by further bad news before. In the meantime, the fallout from the ongoing trade spat is affecting many countries, including Australia, Japan, Korea and others.
However, it's not bad news everywhere. Tired of waiting to see where the penny drops, many companies are moving low-cost manufacturing lines into countries like Vietnam and Thailand, while countries like Bangladesh and Pakistan are benefiting from increasing demand for non-Chinese made textile exports.
For investors that offers some potential positive opportunities. We asked six industry professionals where they are.
The following extracts have been edited for brevity and clarity.
Sam Radwan, chief executive
Enhance International
There will be winners like Vietnam and Taiwan and the like, but in my view that's going to be short-lived from two perspectives.
Number one is, if Trump's in power, he is going to start putting tariffs on [them too] if he sees there's a gap there. Secondly, the overall reduction in demand across the world may also offset a lot of what they gain.
In the long term, I truly believe that especially with enough political turmoil in the US, it may come out of it as a loser in this battle. Meanwhile if the Chinese government is able to play its cards right and mobilise the industry, which its seems to have a lot of control and influence over, it may help China more than hurt over the long-term.
From an asset allocation perspective, the Philippines, Brazil, Vietnam will definitely be something I will take a look at over the short term. But if I were to take the longer term vision, given the fact that I am working with the people who also look at asset allocation from this perspective, I believe the technology side of China will benefit, as some companies are able to emerge as global competitors.
There are several reasons for this. For one, there are free advertisements from Trump; second the situation has built a catalyst for them to move quickly from relying on US technology to build their own independent brands.
Aditya Monappa, managing director of multi-asset and alternatives for Asia Pacific
Alliance Bernstein
Within emerging markets there may be benefits from trade reform to countries that have the potential to add manufacturing capacity in Asia (e.g. Vietnam) or in Latin America. However, in the short term, adding manufacturing capacity in countries outside China will require investment and may not immediately create value, although there could be longer-term benefits as global supply chains shift.
China may not be the biggest loser given its large domestic economy, although it is more exposed than the US. If taken to the extreme (we aren’t there yet), the losers may be those sectors and economies most open and dependent on global trade and with supply chains closely coupled to China’s (e.g., technology supply chains that span across Korea, Taiwan and Japan).
A global recession is not our base case scenario, so we continue to hold more equity than debt in our emerging market strategies. However, if growth continues to decelerate globally (particularly if the trade war escalates), we believe that more externally-geared, growth sensitive assets will underperform and more rate-sensitive assets will hold up better.
In this scenario, the more domestically oriented names should outperform within equity, while the focus of our bond holdings is on dollar-denominated bonds. We see especially compelling rate and credit risk today include Mexico and Indonesia, as well as more idiosyncratic countries such as Egypt, Nigeria and Ukraine.
David Chao, global market strategist, Asia-Pacific
Invesco
The trade wars will not easily be resolved. As we have said for some time, China is in a far better bargaining position than the US; we don’t see any compelling reason why China would capitulate. We think that there will be no absolute winners or losers in the trade war as global growth will suffer if conflicts intensify or continue unabated. The current environment makes it very challenging for business leaders to effectively plan and invest for the future.
We need to remember that it takes companies years to plan and build up their manufacturing and supply chains. Although we have seen a pickup recently in foreign direct investment into countries such as Vietnam and Mexico over the past couple of years, I don’t think this was entirely related to the trade conflict.
Business leaders have cited a host of reasons on why they want to diversify their supply chains from China, including rising labour costs and an appreciating RMB relative to other EM currencies. While we have already seen lower-end manufacturing companies relocate out of places like Dongguan to Southeast Asia, I don’t see higher-end tech companies shifting out of China for the foreseeable future.
Chetan Seth, equity strategist, Asia ex-Japan
Nomura
With nearly a year of data to analyse, we can gauge that Vietnam is far ahead in terms of capitalising on the opportunity provided by the US-China trade spat. The country has a lot of ingredients in place. It is close to China geographically and already has supply chains or ecosystems in place, which means that it can attract similar businesses.
But a risk for Vietnam is that it generates a sizeable merchandise trade surplus with US of around $40 billon. And if the intention of the Trump administration is to create a manufacturing renaissance in the US, and if companies – instead of moving production to US – move to other countries like Vietnam, I would not rule out that it may also be targeted with US tariffs. So that is a risk which investors need to assess.
Meanwhile countries that do not have ecosystems in place or where labour costs are not competitive will be unlikely to benefit from these shifts. So we do not see (say) countries like Pakistan or Bangladesh benefiting from shift of technology-related manufacturing.
However, they could benefit in textile and footwear sectors, where China currently generates a sizeable export surplus and where both these countries have some existing ecosystems in place, plus competitive labour costs.
Alan Li, portfolio manager
Atta Capital
Nearly all countries except for the US and China may benefit from the trade war, with Vietnam and Cambodia benefiting the most. Though many manufactures were already moving out from China before the trade war due to rising production costs, the additional tariff was just the trigger for those on the sidelines.
China will source agricultural and energy products from South America and Australia in the short term while switching back to the US if there is a deal. But manufacturers leaving China may never come back.
Investors have no choice but to stay invested in the US because of the relative stability of the dollar, versus the euro and the yen. Gold and government bonds will also be likely opportunities. That as the market bets the Fed will reduce rates to negative territory in a few years.
Colin Graham, chief investment officer of multi asset solutions
Eastspring Investments
The trade war is a catalyst to speed up outsourcing to a cheaper cost base. For example, once supply chains are changed or factories moved the more difficult it is to reverse, even if the original catalyst dissipates, countries that can substitute China goods in the US and US goods in China will benefit in the longer term.
