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China should brace for US election fallout

During his presidential campaign, Donald Trump singled out China as a currency manipulator and accused it of holding unfair advantage in trade.

Trump has threatened a 45% tariff on imports from China, which has the potential to spark a trade war, said Richard Jerram, chief economist, Bank of Singapore.

“Trump is not likely to clamp down on imports from China (which account for 22% of all US imports) and see them replaced by imports from other Asian economies. US tariffs would be negative for the whole region. The impact would also be damaging for commodity demand and prices.”

Josh Crabb, head of Asian equities at Old Mutual Global Investors, believes tariff increases are likely.

“Trump’s repeated attempts to disparage China at any given opportunity is likely to mean tariff increases, although the exact timing and by how much remains to be seen,” Crabb said, in a research note.

He also believes “we could see the start of a currency war” because Trump had labelled China as a currency manipulator.

Portfolio positioning

However, Crabb said the portfolio has not been changed materially, “other than raising a small amount of cash for de-risking purposes, which we started redeploying again late last week.

“Our strategy remains to be positioned for a cyclical upturn in Asian economies and we would use any market pullbacks as a buying opportunity.”

Likewise, Jing Ning, portfolio manager of Fidelity International’s FF China Focus Fund, singled out short-term noise and is staying with her investment thesis for now.

In the short-term, she believes US-listed Chinese companies in the information technology sector could be negatively impacted. Indeed, Alibaba’s NYSE-listed stock was down -3% yesterday when the Dow Jones Industrial Average soared 1.4%.

“Against this market backdrop, the Chinese A-share market could prove to be a defensive ground. I continue to maintain my long term approach and am focused on the fundamentals in China – an uptrend in corporate earnings in Q3 2016, a cyclical improvement in economic growth and policy efforts focused on addressing the Chinese housing market.”

An end to the EM run?

In 2016, a positive investment consensus has been growing among asset managers for emerging markets investment. China makes up about 30% of the MSCI Emerging Markets Index and negative fallout could therefore dampen emerging market sentiment. 

However, EMs are particularly vulnerable to Trump’s protectionist views that are likely to result in cuts in US imports from EM economies, according to Valentijn van Nieuwenhuijzen, head of multi-asset at NN Investment Partners.

“With China’s domestic demand outlook not particularly bright, the country needs to post decent export growth to prevent a sharp economic growth slowdown.”

Though China is not in the Trans-Pacific Partnership, the sweeping trade agreement is expected to bring the most benefit to Asian economies and there is concern over whether Trump will scrap the pact.

“We believe Trump will carry out his electoral pledge to withdraw from the Trans-Pacific Partnership and renegotiate the North American Free Trade Agreement,” said Crabb, from OMGI. “The effect on Asian economies would be smaller trade surpluses, particularly on the growth of the more export-orientated countries such as South Korea and Taiwan.

“Although domestic-orientated economies are more robust, than say 10 years ago, the potential impact on GDP would still be fairly material in our view. For example, we believe profits of Indian technology and pharmaceutical companies could be affected, although these are not investment areas we favour.”

A positive for China?

Protectionist policies could be a positive for the region, believes Flavia Cheong, head of equities for Asia-Pacific ex-Japan at Aberdeen Asset Management. 

“Over the long run, Trump-inspired protectionism might force Asian countries to accelerate their efforts to shift from export-led growth models to more consumption-based models,” Cheong noted.

“If so, he may do the region a favour. For example, China would finally have the catalyst it needs to fully embrace the painful structural overhaul it has promised.”

Drew Wilson

Drew Wilson is editor of Fund Selector Asia. Previously he was editor at a publication covering private equity.

Part of the Bonhill Group.