EM opportunities amid trade-war talk

Escalating trade threats between the US and China are creating opportunities to buy emerging-market assets, say some money managers.

After the Trump administration proposed tariffs on 1,300 Chinese goods, Beijing responded with an additional 25% levy on about $50 billion of US imports including soybeans, autos and aircraft. A day later Mr Trump upped the ante by asking US officials to consider penalising another $100 billion in Chinese goods.

The decisions have pushed emerging-market stocks to the cheapest since December 2016. However, a negotiated solution might yet be reached to avoid tariffs that won’t take effect for months.

Simon Smiles, chief investment officer at UBS Wealth Management for ultra-high-net-worth clients, said the potential market overreaction gives further reason for money managers to buy into weakness.

“We’re all-in, in terms of the growth impulse, in terms of the relative valuations and that’s against a backdrop of being constructive on risk assets more broadly,” he said, adding that UBS was overweight on emerging-market equities and hard-currency debt.

Gene Frieda, global strategist at Pacific Investment Management Co, said the Chinese actions were not surprising “but the market response shows how confidence has been diminishing”.

“You cannot separate tweets against tech firms from tariff actions against China,” he said of the way investors have been reacting lately to Mr Trump’s every impulse.

Anders Faergemann of PineBridge Investments in London said increased tensions may actually benefit EM assets as markets could dial down their optimistic view of synchronised growth and ultimately global yields will come down. That would add to the return outlook for spread products such as EM debt, he said.

Anastasia Levashova of Blackfriars Asset Management in London, said China buying less soy, avocados and wine from the US means it will buy more from developing nations.

“China has intensified its rhetoric, but I think we are still in a hard negotiation,” added Sebastien Barbe of Credit Agricole.

If risks continue to intensify, he said, Asian currencies would probably be most affected as some countries would be hit given the nature of regional supply chains and considering economies are more open to trade than other developing regions.

Sean Newman, a money manager at Invesco Advisers, said that though trade-war fear should be taken seriously, it isn’t a factor in his long-term outlook for EM assets.

“We like buying here but are conscious that trade tweets may present some downside risk,” he said, noting Mr Trump’s tweets on Monday, when he “hated Nafta in the morning and wanted a deal by the afternoon”.