The latest “trade war” flare-up has more to do with US concerns over the speed of technological development in China than trading practices or currency manipulation, according to Eastspring’s Virginie Maisonneuve.
US president Donald Trump roiled markets after announcing that 10 per cent tariffs on $200bn worth of Chinese goods would be raised to 25 per cent.
The move drew a response from Chinese authorities, which plan to introduce tariffs on $60bn worth of US goods.
The latest development came as a shock to markets – which have risen strongly in 2019 so far – as the prospect of an agreement between the two countries seemed more likely.
As the chart below shows, the MSCI AC World index has risen by 12.25 per cent in sterling terms this year as many of the headwinds dogging markets in 2018 dissipated.
Performance of index YTD
Source: FE Analytics
Yet, the development came as less of a surprise for Eastspring chief investment officer Virginie Maisonneuve, who has been warning of the changing dynamic between US and China for some time.
Maisonneuve said the multipolar world has seen China become an increasingly important figure in global affairs and changed its relationship with the US.
Nowhere has this been more noticeable than in the technology space, she added, noting that much of the dispute has centred around China’s rising technological credentials and disputed claims of intellectual property theft.
“For over a year now we've been talking about trade and tech,” she said. “It's really about competitiveness around technology, which is ultimately global competitiveness. And it's not happening in a smooth way.”
Another factor in opening up the trade row again was the politics in the digital and social media age, where it has become even more important to project a strong image.
“The deal was going to be fine, but it was not strong enough for Trump and it was better politically for him to reject it and have a stronger stance against China,” she said.
As such, there is now a real possibility that it could affect growth for both China, the US and across the globe in 2019.
“If we have full-blown 35 per cent tariffs, we’re talking about potentially [a hit of] 0.3 per cent [to] global growth,” she said. “As you know, the IMF [International Monetary Fund] forecast is 3.3 per cent, so it’s not insignificant.”
An escalation would therefore have a greater impact on the Chinese and US economies, but the impact on the S&P 500, which has been the best-performing developed market index of recent years could also be meaningful.
Performance of indices over 10yrs in US dollar
Source: FE Analytics
The S&P 500 has returned 274.95 per cent in US dollar terms over the past 10 years, against a 99.83 per cent gain for the MSCI China index, as the above chart shows.
However, Maisonneuve said it is likely that fears of a real trade war might be overdone.
“If you step back, there's a lot of [comment] that says the deal is broken, but I think there's probably some posturing,” she added. “I look at the stock market in a way as a democratic voice, or at least the public voice, that the business community and Trump in the US are very much listening to.
“I think the market is saying that this is a very difficult environment. I think there is room for this issue to be dealt with, but it’s not going to be easy.”
Yet, while the renewed trade spat has created uncertainty, it is not a “confirmed risk” for investors right now, said the Eastspring chief investment officer.
“My analysis of politics in the US is that volatility has played into Trump’s hands historically,” she explained.
“Volatility generally creates fear that perhaps some of the electorate in the US feel that Trump is better able to deal with.”
If China were to react too strongly to the provocations it could create greater volatility, which would play into Trump’s hands further, particularly as the presidential elections near.
“I personally think the deal will be made. I don't know exactly know how, but I think it's in nobody's interest to not have a deal. But if you did have no deal it would be the last course [of action],” Maisonneuve added.
After a challenging 2018 for markets, she noted that things are now looking much more positive despite the return of US-China trade difficulties.
“The Fed is bullish now: it was hiking rates in the fourth quarter,” she said. “Europe was in a very tricky position due to fears of tariffs, in particular Germany. Now, it's doing much better.
“The global economy is not growing strongly but it's not in recession.”
While markets were affected by the first bout of trade battles, said Maisonneuve, they were better prepared for the latest flare-up.
“That doesn't mean we shouldn't take it seriously,” she said. “I personally think the market corrected too quickly before they’d even had discussions.”
Eastspring has added some low volatility strategies to its own multi-asset portfolios, which performed strongly for the firm last year, but is now in a position to add more risk.
It remains overweight US equities because of the strength of the economy and greater levels of investment.
“I’m looking at consumer confidence and business confidence, and I think we could be surprised on the upside by investment in the US,” Maisonneuve said. “The US has one slight positive versus the rest of the world. So earnings revision is generally not very strong, right? It's actually negative, but the US versus the trend is doing better.”