ANZ’s chief investment office has responded to possible continued fallout from the US-China trade war with a modest shift toward more defensive investing.
We’ve moved from “underweight” in our exposure to international fixed-income assets, such as bonds, towards “benchmark”.
Markets have reacted to the trade war by pricing in rate cuts across a raft of central banks. This expectation has supported the current valuations of bonds and equities.
As we discussed in the previous House view, global growth was likely stabilising but one of the key risks is the trade war, and it’s becoming clearer that a near-term truce between the conflicting nations is unlikely.
It has been more than a year since the US and China began jousting on trade policy. The most recent move by the US was to lift tariffs on $US250 billion of Chinese goods by 15 per cent, with US President Donald Trump threatening 25 per cent tariffs on remaining Chinese imports worth around $US300 billion.
Companies to suffer in trade-war fallout
The government also banned US companies, such as Google and other technology businesses, from supplying products to Chinese telecommunication powerhouse Huawei. Such measures mean US trade policy is threatening to unpick global supply chains that have evolved over the past 20 years.
The stakes are high for the sharemarket in this trade war. Listed manufacturers in emerging markets are particularly exposed to the fallout – such as the break-up of global supply chains and the uncertainty this creates – which means their plans to spend capital may be put back in the draw.
Of course, the tariffs also directly raise costs for many US companies, with these costs passed on, absorbed, or offset against any gains in their productivity. Regardless of the way companies choose to react, they will likely have lower profit margins as a result of a prolonged trade war.
Through May, key indicators – such as slowing take up of credit in China and high company inventories (unsold goods) across most regions – have been sources of concern, and signs of companies’ capital expenditure have slowed further. Moreover, it is likely the trade war and the Huawei ban could further depress company activity and these indicators in the months ahead.
Recessionary forces become stronger
All the tariff hostility happening is increasing the likelihood of a recession:
- Our tracking has led us to increase our assessment of recession risk from 25 per cent to 30 per cent.
- The Federal Reserve Bank of New York gauges risk of recession at 27 per cent (still slightly below the 30 per cent level that usually flags a recession within the next year or so).
- Our investment-cycle clock has also risen further (due to the tightness of the US labour market) – and a further lift is often associated with a fall in returns from shares of 20 per cent or more.