EM investors see no olive branch in US-China trade spat

Trade war-hardened emerging-market investors aren’t counting on any breakthrough in trade negotiations as talks between the US and China are set to resume today in Washington. BNP Paribas Asset Management has been reducing its exposure in junkrated debt, while Union Investments Privatfonds GmbH is favouring investment-grade rated bonds over high-yield debt. And in case any breakdown in discussions triggers a flight to safety, Aviva Investors has been buying the yen.

“We expect another empty-handshake meeting,” said Bryan Carter, Londonbased head of emerging-market fixed-income at BNP Paribas Asset. Ultimately, no substantive agreement will be reached, he said. Emerging-market stocks rebounded 2.2% since an early September low, when China and the US announced they would hold face-to-face negotiations once again. The rally has since petered out after President Donald Trump said he won’t seek an interim agreement and global growth showed further signs of deterioration as the year-long trade war dragged on. Impeachment proceedings have also spurred concern that it may hinder Trump’s hand in the negotiations.

Below are comments from investors and analysts:

Maddi Dessner, multi-asset strategist at JP Morgan Asset Management in New York, tells Bloomberg Television: Bar is much lower for US-China trade talks this week than it has been in previous negotiations. “Investors are much more conservatively positioned than they were even six months ago,” so there’s not as much of a negative risk.

To have exposure to equities, investors can buy futures, stocks or upside calls, which allow them to gain upside in rallies and lose equity risk in their portfolio when market draws down. Brendan McKenna, a currency strategist at Wells Fargo in New York: “Trade relations between the US and China will probably get worse before they get better”. No trade truce or breakthrough this week, and Trump will probably move forward with plans to increase and impose more tariffs. Escalations will hurt EM currencies broadly, especially emerging Asia’s IDR, INR and PHP; highbeta currencies TRY, ZAR, MXN and BRL likely to also come under pressure. Expect more downside in the renminbi and more risk-sensitive currencies such as the AUD, NZD, KRW.

Jim Caron, global head of macro strategies at Morgan Stanley Investment Management in New York: Trade tensions put a damper on global growth, and expectations are for continued talks.

“I don’t think that anybody really expected there to be a grand bargain this week with China”. Alejandro Cuadrado, a senior BBVA strategist in New York: Likes being “defensive (USD biased) with a preference for hedging through CLP” ahead of trade talks. “Our expectations are low as we don’t see the incentives fully lined up”.

Prefers hedging through options in LatAm crosses given region’s sensitivity to global trade, lower levels and higher costs.

Sergey Dergachev, senior portfolio manager at Union Investment in Frankfurt: Expectations for a breakthrough are “very low,” though it will be important to see how the meeting will end and the mood during the meeting.

Future steps are also crucial, such as when the next round of talks will be. Dergachev said he’s positioned “mildly defensive,” and is focusing on the credit quality of his holdings. Werner Gey van Pittius, co-head of emergingmarket fixed income at Investec Asset Management in London: The trade war will last longer than what the market is hoping because it’s not just about trade. There’s an element in the US that is afraid of “the geopolitical rise of China” and that is much bigger than just trade right now.

China is preparing for the next decade and trying to reduce the impact of the trade war by opening up their markets, attracting capital, and moving away from US influence by selling Treasuries and buying gold. Their time horizon is beyond the US elections.

He is taking a long duration strategy in his bond portfolio as the trade war raises the risk of a recession Carter at BNP Paribas Asset: Politics are driving the negotiations, and not economics. The upcoming 2020 presidential election, and impeachment investigations in the House, are the dominant context for the trade meeting. Carter said he plans to continue cutting exposure to junk-rated bonds even if there was a positive outcome from the meeting.

That’s because the firm doesn’t expect any comprehensive agreement will be reached that would reverse the negative economic effects of the trade war.

Mark Haefele, global chief investment officer at UBS Global Wealth Management in Zurich, tells Bloomberg Television: Base case is for tensions to neither worsen nor improve much, with the US to go ahead with the announced additional tariffs.

UBS Global is underweight equities globally at this time; the trade impact will be felt hardest in Europe and emerging markets, while the S&P will probably be range-bound.

Stuart Ritson, emerging-market bond fund manager at Aviva Investors in Singapore: It is hard to be too optimistic on the outcome of trade talks given the narrow scope of the discussions. The firm’s local-currency bond portfolio is “relatively defensive” at the moment, given the weak global growth backdrop. It is also positioned for further easing by EM policy makers and has increased exposure to the yen, given its anticyclical properties, and still attractive valuations. Robert Carnell, chief economist for Asia Pacific at ING Group NV in Singapore, writes in a note: China may see it as advantageous to keep the trade war alive, but under control, pending political developments in the US.

For the US, the benefits of fighting China on trade may now be outweighed by the short-term hit to the economy, in terms of popular support and potential votes for Trump at next year’s presidential election.

Stephen Innes, an Asia-Pacific market strategist at AxiTrader, writes in a report: In the absence of a significant catalyst, Asian currencies will continue to track the yuan, which remains the best global barometer for trade war risk. Headline risk will continue to influence trading flows in the Chinese currency.