It wasn’t the first cannon firing – but it may as well have been.
On March 22, U.S President Donald Trump announced tariffs on US$60 billion worth of Chinese goods coming into the U.S. The Office of the U.S. Trade Representative had just days before concluded an investigation into China’s trade practices that supported the measure.
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Since then, trade tensions have ramped up. The U.S. and China have implemented tit-for-tat tariffs on US$50 billion of exports from each side, and are on the brink of slapping tariffs on hundreds of billions more worth of exports.
Investors have been worried about the potential fallout of a trade war on the economies of China, the U.S., and everything in between. We’ve written previously about what the consequences of the trade war could be (see here, here and here).
Now, after six months, the impact on global markets is clear. And we have a better idea about the future impact…
China is “losing” and the U.S. is “winning”
The impact of the trade war on China’s economy, thus far, seems minimal – and, oddly, looks to be the opposite of what you might expect.
Chinese exports continued to grow nearly 10 percent year-to-year in August, down slightly from 12.2 percent growth in July. And China’s trade surplus (the excess of its total exports over its total imports) with the U.S. hit a new record of US$31 billion in August.
So in the short term, Trump’s tariffs are having the exact opposite effect on trade. China is exporting more to the U.S. – not less.
Now, one possible explanation is that U.S. buyers may be stockpiling Chinese imports ahead of additional anticipated tariffs.
Chinese exports to the U.S. were also likely bolstered by the 8 percent devaluation in the Chinese yuan since March 22, which significantly offset the impact of tariffs already in place… and further cheapened those products not yet taxed by the Office of the U.S. Trade Representative.
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But stock markets anticipate – they reflect expectations, rather than the present. And markets appear to be anticipating a slowdown in the earnings of Asia’s companies – as reflected in the 8.2 percent decline in the MSCI Asia ex-Japan Index since March 22. China’s Shanghai Composite Index has also dropped 20.3 percent. By comparison, the S&P 500 has gained 10.5 percent over the same period.
By this measure, China is losing, the U.S. is winning. China has a lot more to lose in this trade war than the U.S., because China exports goods worth US$530 billion a year to the U.S. On the other hand, it imports just US$187 billion of U.S. goods annually. So China’s scope to retaliate is limited.
So how are other Asian markets doing?
As shown in the graph above, other markets that have been the region’s worst-performers since the trade war began include Vietnam (down 17.8 percent), Singapore (down 9.5 percent) and Hong Kong (down 7.6 percent). All of these countries have economies that are significantly tethered to China’s performance, so a potential Chinese slowdown could be detrimental to their economies.
The strong performers in Asia since the trade war have been India and Australia. India, in particular, has seen its economy strengthen on the back of economic reforms and soaring domestic consumption, with GDP growth hitting a blistering 8.2 percent in the first quarter of the 2019 fiscal year.
But it’s important to note that the trade war is also one dynamic of the stock market. As I said earlier, the stock market reflects expectations of corporate earnings, the local economy, interest rates, exchange rates and a broad range of other markets. The evolving trade war is an important input, but only one of many.
How Asian stock market sectors have performed
So what specific Asian sectors are being hit the hardest – or benefitting from the trade war?
As the graph below shows, the energy and utilities sectors of the MSCI Asia ex-Japan index have outperformed, rising 5.4 percent and 0.9 percent, respectively. The telecommunications sector has declined just a modest 0.9 percent.
But as you can see, sectors heavily dependent on the global trade and supply chain performed the worst. These include the consumer discretionary (i.e., leisure products and automobiles), information technology and industrials sectors.
President Trump now says he wants to slap tariffs on Chinese exports that have not yet been affected by the trade war (estimated at US$267 billion) as soon as possible. So the same markets and sectors that have done well over the last six months will likely continue to outperform well. And the sectors that have done poorly will likely continue to underperform.
So in this deteriorating trade environment, you want to have more exposure to Australian and Indian stocks. And based on recent performance, the energy, utilities and telecommunications sectors will likely continue to outperform.
Editor, Stansberry Churchouse Research