Trade war rhetoric resurfaced this week after US President Trump abruptly announced plans to raise 10% to 25% tariffs on USD 200bn and an outright 25% of another USD 325bn worth of Chinese goods. Although some market commenters have speculated that this is a negotiating tactic from Trump to use as leverage as they enter the final stages of the negotiation, it still caught many investors by surprise. YTD market gains were in anticipation of successful trade negotiations concluding this year. Hence, the market sell off was broad-based. We have communicated to investors that we expect volatility down the road given the strong rise in markets YTD, regardless of the trade talks, and we were not surprised by the near-term consolidation.
Our base case remains for a negotiated trade settlement, and the likelihood of a “full-blown trade war" is low. A lot of US corporates operate internationally and China is seen as a huge market for them. The trade talks will continue and a Chinese delegation will visit Washington later this week to resume negotiations. We still expect a deal between the two giants, but when, is still unclear.
Further to this, the Chinese central bank, People’s Bank of China, announced that it will lower the required reserve ratio for mid- and small-sized banks focusing on local economies. The prompt action of the targeted easing suggested that the Chinese leaders have plans for different scenarios.
The negotiation path to a final US-China trade outcome remains a swing factor to market performance. From a medium-term perspective, we will continue to closely monitor events. Nonetheless, we believe that a gradual economic slowdown is already priced in and the Chinese authorities will provide necessary regulatory support to help smooth the ongoing economic transition.
We continue to be highly selective and believe our high conviction core positions have solid long-term growth prospects and will benefit from the domestic growth story. In our China portfolios, the overall revenue exposure of our underlying holdings to the US are minimal (China Opp: 1.2%, China A: 1.3% as of 6 May 2019).