Reflecting on June: Ongoing US – China trade disputes

Mark Nelson covers and reviews the escalating tensions between the US & China and how it has affected financial markets in June.

Reflecting on June: Ongoing US – China trade disputes

What has happened?

Global stock markets, but in particular emerging market equities, declined in June. The MSCI All Country World index fell by 0.7% over the course of the month. Developed markets, as measured by the MSCI World index, were lower by 0.2%, while the MSCI Emerging Markets index fell 4.6%.

Why?

Tensions between the US and China intensified in June. Since President Trump took office in November 2016, he has committed to resolutely defending US economic and businesses interests, which he considers to be under threat from China. Trump recently accused China of the “greatest theft in the history of the world” and in May demanded that China act to reduce its trade deficit with the US, stop stealing US intellectual property, reduce tariffs on US goods and cease subsidising tech companies. China has so far failed to comply with the US President’s demands. The lack of progress threatens to turn what has been up until now a phoney war based on a series of tit-for-tat threats into a real trade war, as $34bn of tariffs on Chinese imports are set to come into force today, the 6th July. China has promised to retaliate on the same day with tariffs of equal size.

Trump feels that the US is holding all the cards in its dispute with China. There are limits on China’s ability to respond to US action with similar tariffs given that the US buys far from China than China buys from the US. However, there are other avenues through which China could retaliate such as stopping Chinese students and tourists from going to America, making it difficult for US companies with operations in China to do business, and by encouraging state-owned and private companies to use alternative suppliers of goods and services that are currently being purchased from the US. There are likely to be few winners from an all-out trade war.

What should you take away from it?

While the prospect of an escalating trade war represents a risk to equity markets, particularly those in the emerging economies, a resolution could equally spark a move higher for stock markets. Some believe that Trump’s threats against China represent nothing more than electioneering ahead of the US mid-terms, however, such is the unpredictability of politics and in particular the politics of Donald Trump that it remains difficult to call the outcome to the ongoing dispute.

Situations such as this, in our opinion, reinforce the importance of diversification within ones portfolio. Exposure to a geographically diverse range of companies with exposures to different sectors and different economies can reduce the level of political risk within a portfolio of investments. At Killik & Co we take a global view on investments and provide recommendations on companies and / or funds that operate in a number of different regions around the world. To discuss these recommendations, or the geographic exposures within your portfolio, please contact your Investment Manager.