Hong Kong/Singapore — A billion here, a billion there, and pretty soon you’re talking about real money, as one American politician once said. Now that the US-China trade spat is encompassing potentially hundreds of billions of dollars, investors are under pressure to figure out how to respond.
The initial reaction to US President Donald Trump’s threat to slap tariffs on an additional $200bn of Chinese imports was to bail out of US stock futures and pile into the yen, the trusty safe-haven currency thanks to Japan’s record net-creditor status. Contracts on the S&P 500 Index were down 0.9% and the yen up 0.6% against the dollar as of 12.47pm in Tokyo. Equities also tumbled from Tokyo to Hong Kong, and Treasuries rose as China threatened retaliation.
But how about beyond Tuesday? If the world’s top two economies are now in a trade war, how should investors position themselves? The following are some thoughts from fund managers and strategists.
"Will it escalate from here? We’d certainly hope not, but it’s certainly a risk," Craig Vardy, head of fixed income in Australia for BlackRock, said in an interview in Sydney. "If you’ve been running a lot of risks in this market, then chances are you’d be almost under water."
Taking positions based on the outcome of trade negotiations is difficult because the results are so unknown, so the strategy has been to run low risk in an active bond fund, Vardy said. Also avoid "volatility around tweets" and keep riskier positions for short term bets.
Central banks remain the key driver for the possible end of the current bull market cycle, said Nader Naeimi, head of dynamic markets at AMP in Sydney.
"This is what I call a Shakespearean market, full of sound and fury, signifying nothing," he said. "Politics doesn’t end cycles, it’s central banks. But at some point, trade skirmishes and increasing tariffs will add to US and global inflation and if that happens and forces the US Fed into the corner, then we will have a problem."
In the meantime, Naeimi is using the currency market for protection. He likes hedging with yen against the Australian dollar, Korean won and Canadian dollar. "There will be a tragedy somewhere, so we can’t totally dismiss the risk."
While the rhetoric is flying hot and fast between the US and China, it’s more difficult to actually quantify what qualifies as an official trade war, said Stephen Innes, head of trading at Oanda in Singapore.
"Right now it is tit-for-tat with little economic impact. A full-blown war will involve" much greater tariff amounts and goods, which would hurt corporate earnings. "China has the upper hand here. It’s cheap right now, so hedging risk now is prudent before it’s too late."
Innes recommends buying the yen rather than the dollar while shorting the Canadian dollar on the North American Free Trade Agreement (Nafta) woes and oil price risks. He also likes shorting the Australian dollar as it will "crater" due to its role in the global supply chain and vulnerability to commodities prices. "US bonds will be a safety umbrella that a lot of investors will seek out."
Principal Global Investors
Investors who can stomach the risk can find opportunities to buy in the Chinese stock market, said Binay Chandgothia, a fund manager at Principal Global, which manages about $445bn globally.
"Expectations for everything from earnings to growth to returns will get to the stage where they’ve factored in all the bad news," Chandgothia said. "Valuations by themselves aren’t triggers in the short run, but there will be opportunities there."
Potential winners include China’s tech giants Tencent, Baidu and Alibaba, he said. "They’re all primarily domestic-focused and you could find some opportunities in those names if you believe the export environment will suffer."
Shinkin Asset Management
"Yen buying on risk aversion will dominate markets," said Jun Kato, chief market strategist at Shinkin in Tokyo, who thinks emerging markets are unlikely to recover in the current environment.
While the dollar has been underpinned by monetary policy divergence between the US Federal Reserve and the Bank of Japan, sentiment may change if the pair drops below the ¥109.90 to ¥109.85 level this week, Kato said. The yen was testing those levels on Tuesday morning in Tokyo.
K2 Asset Management
Currencies are the most likely assets to price in a trade war, and investors need to be aware of the foreign exchange impact on their equity holdings, said James Soutter, head of global equities at K2 in Melbourne. It may be tough to calculate the impact, however.
"Estimating the financial impact versus understanding the risks are two different things," he said. "It was very difficult for anyone to price in the Asian currency crises of the 1990s, as extreme events are rare by their nature."