China-US trade conflict: short term uncertainty

While the China-US trade conflict has been escalating and global economic growth is slowing, investors shouldn't forget that China is a long-term investment story.

by Andreas Fuchs 24 Oct 2018

China's stronger economic growth has been one of the main reasons for investing in China.

However, the International Monetary Fund's latest outlook1 indicates that the global economic weather is beginning to change. The IMF expects the global economy to expand 3.7% this year, down from the April estimate of 3.9%.

The IMF named rising trade protectionism and instability in emerging markets as key reasons for this slowdown. China's economy is forecast to grow 6.6% in 2018 and 6.2% in 2019.

China prepared for confrontation

The China-US trade conflict escalated during recent months and up to now there are no signs that the two countries will come to a solution soon.

US Vice President Mike Pence added more fuel to the fire when helevelled multiple allegations at China in a speech in early October.

Although the Chinese economy is slowing, the country has the ability to ramp up domestic spending, and it has already started doing that.

As the People's Bank of China explained in a brief statement on its website, it will "provide further support to real economic development, improve the structure of liquidity for commercial banks and financial markets, and reduce financing costs." These measures are designed to stimulate growth and thus soften the impact of US tariffs on imports from China.

Flexible companies have an edge

According to Geoffrey Wong, UBS AM's head of Emerging Markets Equities, the trade conflict is certainly negative with respect to investing in China: "It causes companies in their investment plans to hesitate. The managers ask themselves - where should we put the next factory? Should we build it in China or in another emerging country? Or should it be in the US? It depends a lot on how a company can handle the situation. Eventually, successful companies fill up the capacity of their factories and they will have to make a decision where to invest."

Geoffrey Wong also believes that good companies will adapt: "They can change their supply chain for example. After the new administration was elected in the US, one of the biggest Taiwanese makers of electronics opened a factory in the state of Wisconsin."

UBS China Equities – focusing on quality stocks and China's domestic growth story

While UBS AM's China equities team is monitoring trade-related events as well as GDP numbers very closely, this isn't the main focus.

Despite slower growth, fundamental changes are happening in China's economy, creating opportunities in sectors like consumer, healthcare, IT and insurance.

We believe that the team's portfolios are less sensitive to trade tensions as investments are focused on the domestic growth story within China.

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