Escalating trade tensions between the US and China is a short term concern, but won’t lead to a crisis in emerging markets, according to these UK-based fund managers.

Fears over the potential for a full-blown trade war, prompted by US President Donald Trump's threat of tariffs, have been simmering for months now. After a slight lull, news flow has ramped up in recent days, with the US administration adding an additional $200 billion worth of products to its list of targets. And the tariffs could be implemented as soon as September.

And it’s worrying many investors, with Mark Burgess, chief investment officer at Columbia Threadneedle, saying "it’s profoundly depressing that the leader of the free world fundamentally doesn’t understand how global economics works".

"It’s also profoundly depressing that he thinks a trade war is a war he can win," he adds.

David Donora, head of commodities at Threadneedle, believes an escalation of the trade conflicts and imposition of sanctions "will do nothing to spur global growth and will be significantly negative".

"In this situation, there’s no winners. The country that wins is the country that either loses the least, or loses the least relative to others, so it becomes a zero-sum game.”

Chinese Ship Trade War

China has plenty of reserves....is well set, and has a lot of levers it can pull.

Target globalisation, not China

Clearly, as Donora points out, it will impact all parties. However, many emerging markets will be adversely affected due to the potential for the US dollar to strengthen further than it has in recent months. China is likely to bear the brunt of that given that is the target of Trump's ire.

Thompson, who manages the Neptune Emerging Markets fund, says he is concerned and admits he will probably be forced into making some changes to his portfolio, though he only foresees “a dialling back of our conviction areas in some of the more cyclical sectors of the market, just because that would affect their operating environment”.

Thompson says that the US’s problem should be with globalisation and automation, not China, though it seems the States does not agree. “The huge irony,” he explains, “is that China’s current account surplus is actually coming down so actually all the stuff [the US] wants to see is happening anyway. They are fighting the battle of the last 10 years now.

“They’re talking about steel exports, but China has completely stopped exporting steel for their own reasons; their current account surplus is falling; the currency is stabilised – it’s definitely the wrong time to be fighting the battle.”

But they are fighting the battle, of course. And Thompson admits it is going to be “unhelpful”. But, “the longer term the horizon, the less worried I am”.

Stronger dollar is a headwind

Indeed, he certainly doesn’t see the impact causing a crisis in either China or emerging markets in general. “China has plenty of reserves. It’s well set and has a lot of levers it can pull,” adds Thompson.

“The rest of emerging markets on the whole is also well set, so I don’t think this is a crisis. If it leads to a stronger dollar, then that’s a headwind emerging markets don’t tend to enjoy so at that point you’ll have a slightly more defensive profile to the fund.”

 

More from Morningstar

• Aussie investors putting too many eggs in the local basket

• Trade war threat doesn't warrant investor panic

• Make better investment decisions with Morningstar Premium | Free 4-week trial

 

David Brenchley is a reporter for Morningstar UK.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.