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Fund managers flag peril to US stocks from trade tensions

US multinational companies would be the biggest losers of a trade war with China, according to fund managers.

Fund managers flag peril to US stocks from trade tensions

Fund managers have underlined the dangers for large US multinational stocks from an escalating trade war with China, as the White House shows signs of adopting a more diplomatic tone.

Last week US president Donald Trump announced punitive tariffs on as much as $60 billion of imports from China. Although details were scarce as Trump has 15 days to detail which products would face a levy, the Chinese government was quick to respond with its own plan for $3 billion of tariffs on US pork, steel, recycled aluminium, fruit, ginseng, and wine.

The amounts targeted are modest compared the $600 billion traded between the two countries, but investors have taken fright at the moves.

'Whilst the current proposals for tariffs are limited, there is a risk that this might escalate and become more damaging. It is this risk that markets have recently started to focus on,' said Tim Orchard, chief investment officer for Asia Pacific ex-Japan equities at fund group Fidelity.

Markets sold off last week as Trump ratcheted up tensions over trade, but a more diplomatic tone over the weekend sparked a strong rebound in US markets overnight, carrying through to trading on European stock markets today.

Fidelity fund manager Yee Kok Wei meanwhile doubted Trump’s ability to extract concessions from China, arguing the trade strategy lacked domestic support ‘let alone internationally’.

‘The last US president that managed to get significant concessions from trade partners was [Ronald] Reagan,’ he said. ‘It was different then, as Reagan was a largely popular president with broad economic support, and with an ongoing cold war, he had the luxury of significant security leverage with trade partners.

‘I believe Trump will have to eventually reverse course, so maybe the markets going down harder and faster in the near term might be a price worth paying.’

Alex Wolf, senior emerging market economist at Aberdeen Standard Investments, said any escalation from the US would be met with retalitaion from China, with US multinationals likely to bear the brunt.

‘While US exports to China are relatively insignificant, US multinational revenues in China are significant,’ he said.

The Chinese government has used non-tariff barriers to trade before, including putting obstacles in the way of Korean companies.

Wolf said China could ‘increase the regulatory burden on US companies through new inspections and rules, they can stop providing export licenses… raise the tax burden on US multinationals… or they could simply block US companies from the government procurement market’.

The last resort is an ‘unofficial boycott’ of big name companies in order to pressure Washington into reversing its decision.

‘This could put US companies such as Apple, Microsoft, Starbucks, GM, Nike in the firing line,’ he said. ‘Beijing would probably view this as a lower cost strategy, they could restrict the sale of foreign goods, increase market space for domestic competitors, and put pressure on US equity markets.’

Wolf added that the ‘informal’ retaliation would be outside the bounds of the World Trade Organisation ‘which makes it particularly dangerous’.

‘It’s also why a trade war might have a larger impact on corporate earnings than on macro variables like exports and inflation,’ said Wolf.

‘Both countries have the potential to inflict serious damage on each other, but certainly not without large costs to their own economy.’

Bryan Collins, head of fixed income at Fidelity, meanwhile flagged potential buying opportunities from any further volatility on trade war fears. 

'The news related to trade protectionism will lead to pockets of volatility, although considering the supportive macro fundamentals, this will likely present itself as a potential buying opportunities,' he said.

He highlighted China's growth in consumption, which was transitioning the economy away from a reliance on exports, and flagged countries like India which were likely to escape relatively unscathed from a rise in protectionism. 

'India has a more self-contained economy, which makes it relatively insulated compared to other export-driven economies,' he said.

Safe haven assets like the Japanese yen could meanwhile be expected to benefit from any escalation in the rhetoric between the US and China, according to Sandra Holdsworth, manager of the Kames Absolute Return Bond Global fund.

‘The current risk is trade wars and therefore protectionism following president Trump imposing new tariffs on steel and aluminium imports,’ said Holdsworth. ‘If these tariffs are the catalyst for a broader trade war, expect the yen to strengthen given the uncertainty.’

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