Stocks on roller coaster amid trade war confusion
THESE are the days for the brave at heart in the equities markets.
Emerging markets (EMs) may be the latest safe haven, but that does not mean stocks in these markets will generally climb.
Valuations in EMs are said to be compelling and volatility has subsided compared with that of the developed world.
There is even a suggestion that investors put up to 90% of their money into EMs. Funds are flowing into EMs, also spurred by expectations that longer-term bond yields (which move inversely to prices) will likely drop, making stocks more appealing.
As major central banks unwind their balance sheets and withdraw liquidity from the markets, it was noted that EMs, which now have a growth story, had not undertaken quantitative easing (propping up markets with floods of money).
“Funds are seeking cover in EMs on assumption that no global crisis is going to develop. For astute, long-term investors, valuations are starting to look attractive, but note that in a bear market, stocks will mostly fall,” said Pong Teng Siew, head of research at Inter-Pacific Securities.
Against an environment of lower liquidity, disappointment in developed markets also stem from confusion over the signals sent by top officials involved in the simmering US-China trade.
Just before President Donald Trump burst onto the scene last Thursday with a plan for an additional US$100bil of tariffs on imports from China, newly appointed economic adviser Larry Kudlow had spent many hours trying to calm the markets.
By last Friday, the Dow had surrendered all its gains from the previous two days, with Trump saying there would be some pain, but trade steps taken would make the United States stronger.
Suddenly, Trump tweeted that China would probably lower trade barriers which would be reciprocal, and a deal on intellectual property would likely be struck.
Many are keeping their fingers crossed that this tit for tat may be some posturing for negotiations (which according to Kudlow, is via back channels or informal talks), but tempers have been rising.
The United States still has plenty of Chinese imports to tax on; all are watching China’s next retaliatory moves as it runs out of US imports to tax on. “It can retaliate in services, where the United States has a surplus. It can cut the US technology industry off its supply of rare earth elements, 85% of which comes from China,” said Pong.
Right now, there is a lot of speculation on how this trade brawl is going to be resolved.
“The trade war is real; it has already helped the United States extract promises from China to do more to open its economy, and respect intellectual property rights.
“But China will not back down; that will open the door for Trump to ask for more concessions. Trump will continue to up the ante, as he feels the United States has nothing to lose from this,” said Pong.
The US trade deficit for February hit a nineand-a-half month high of US$57.6bil.
Tensions can prolong due to a lack of consensus within the Trump administration.
“Treasury secretary Steven Mnuchin and Kudlow may be indicating trade talks but Trump has spoken on the contrary, suggesting the influence of policy hawks like commerce secretary Wilbur Ross, US trade representative Robert Lighthizer and trade adviser Peter Navarro,” said Suhaimi Illias, group chief economist at Maybank Investment Bank.
Some agree that Trump’s complaints about unfair competition from China are true, although they prefer engagement rather than confrontation to solve the problem.
Parties may lose patience but “it is a big mistake for the United States to bypass the dispute settlement body of the World Trade Organisation and unilaterally rely on its laws alone to initiate trade tariffs on China,” said Lee Heng Guie, executive director of the Socio Economic Research Centre.
If the 60 days for comments are over, and tariffs implemented, higher inflation for manufactured goods will likely follow suit, and global growth will slow down further.
“Data from the Institute of Supply Management shows the highest rise in prices in seven years for US manufacturing,” said Pong.
On the bright side, possible diversions may benefit “German and Japanese carmakers, European agriculture, food and beverage industries, Latin American soybean farmers, Asia’s petrochemical manufacturers and the producers of agriculture and food products,” said Suhaimi.