Investment summary
Trade war risk has escalated sharply recently following the tit-for-tat action between US and China to impose tariffs on an initial US$50bn worth of imports respectively. This was followed by President Trump’s threat to consider tariffs on another US$200bn of China imports, which is on top of the US$100bn under investigation. Our Chief Economist views potentially higher level US concerns beyond trade and with Congress unlikely to provide the checks and balances on President Trump, financial markets may have to worsen first as a form of restraint. Our investment strategist suggests a cautious asset allocation stance and to look for companies sheltered from trade uncertainty. However, markets could also rebound in a relief rally should trade tensions ease. We expect market volatility to remain elevated and maintain our barbell approach between Cyclical (prefer Financials and Consumer Discretionary) and Defensive (Healthcare and Telecom) sectors. We highlight US companies with large domestic revenue and cost exposure and are less likely to be affected by trade tensions. Within China, we look for companies that could benefit from potential policy easing to support domestic demand.

US companies with large domestic exposure less vulnerable
The current announced China tariffs on US imports are focused on hurting President Trump’s support base (eg. agriculture) but there is a limit on direct trade retaliation by China with significantly less US imports of US$130bn in 2017 compared to China exports of US$505bn to US. The next phase could potentially see China adopting non-tariff retaliatory measures against US companies with operations in China. Hence our preferred US picks would be for companies with large domestic operations, no significant sales to or imports from China and/or benefit from stronger US economic growth and rate hikes.

 

Shelter from trade tensions and slowing China macro

 

Within China, the threat of weaker exports due to trade war and disappointing May macro data has led both the government and PBOC to signal that they could ease policies to boost domestic demand. The market is anticipating an easing of current credit tightening measures including a reserve requirement ratio (RRR) cut of up to 200bps for the rest of 2018 and fine-tuning of the implementation of new rules on the asset management industry. Other supportive measures could include fiscal stimulus through more public-private partnership projects and infrastructure spending which would benefit utilities and infrastructure construction companies. We also like domestic plays benefitting from structural trends such as the auto consumption upgrade.

TICKER COMPANY SECTOR % REVENUE FROM CHINA UPSIDE (%)
941 HK CHINA MOBILE LTD TELECOM 100 49%
1114 HK BRILLIANCE CHINA AUTOMOTIVE CONSUMER DISCRETIONARY 94 44%
1800 HK CHINA COMMUNICATIONS CONST-H INDUSTRIALS 77 39%
257 HK CHINA EVERBRIGHT INTL-LTD INDUSTRIALS 98 35%
1186 HK CHINA RAILWAY CONSTRUCTION-H INDUSTRIALS 94 33%

Source: Bloomberg, Truman analysts

 

Risk of contagion from tightly integrated supply chains
While the current US$50bn worth of trade tariffs are targeted at China, the affected products include mainly electronics which rely on tightly integrated supply chains. Hence, any trade shock on China could potentially impact the region too, in particular North Asia which has greater tech sector exposure. Within our coverage universe, we have limited Asia stocks that could be affected, though the bigger risk is from a broader market risk-off sentiment. Instead, it is likely to be US companies, especially technology companies which have large Asia revenue exposure, which could potentially be hurt by the trade tariffs.

Contact one of our investment professionals today in order to safely navigate the trade wars.