Despite Donald Trump and Xi Jinping’s G20 handshake, trade woes will remain a drag on markets, especially in Asia

Slowing global growth will negatively impact trade, while Sino-US talks have had too many twists and turns for investors to become complacent, despite the good optics coming out of Osaka

Hannah Anderson

Published: 3:00am, 6 Jul 2019

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Trade concerns will continue to plague markets for the rest of 2019 and well beyond. This is not only the result of the US government’s shift towards more protectionist policies, but also due to the effects of slowing global growth on international trade.

Setting aside the US-China trade dynamic – but only momentarily, as this situation is one of the most important considerations when making asset allocation decisions this year – markets care about trade because of what it signals for business activity.

Slower growth in international trade is typically a negative signal for equity markets, particularly in externally exposed economies like those in East Asia. Modest growth means less demand for imports, resulting in fewer exports from the Asian manufacturing powerhouses like South Korea and Taiwan.

Collectively, these issues imply that equity markets, broadly, will see lower profit growth in 2019. This is particularly true for Asian emerging markets, where exports and profits are highly correlated and, to the extent profits contribute to returns, lower trade means lower returns.

Indeed, amid this environment of trade tensions, earnings per share estimates for the full year have declined, dragging markets lower with them.

Other ongoing trade disputes, like between the US and Europe, add another layer of uncertainty, and may make trade more expensive if additional tariffs are applied. Paying attention to the US-China relationship at the expense of these other simmering tensions may mean ignoring a source of additional volatility later in the year.

That being said, the US-China dispute still deserves a great deal of focus, despite the ceasefire announced in Osaka. “We have reached an understanding,” US President Donald Trump proclaimed, but that is not the same thing as signing a deal.

No trade deal, no problem: a Xi-Trump meeting is already a win

Those who aren’t playing close attention may have seen the positive headlines and assumed they could shift their focus to other dynamics (like US Federal Reserve policy) when making investment decisions for the rest of the year, when that is unlikely to work in their favour.

Indeed, markets started off the week in a rather optimistic state, before recalibrating for the reality they actually face. The adage “once bitten, twice shy” comes to mind.

Before their positive meeting at the G20 Summit in Osaka, Chinese President Xi Jinping and US President Donald Trump had a similarly upbeat meeting at the G20 in Buenos Aires on December 1 that failed to prevent a later breakdown in negotiations. Photo: AP

We saw almost exactly the same rise in rhetoric, followed by a smiling handshake and the postponement of further restrictions, at the G20 on December 1, only for tensions to rise again when negotiations did not progress fast enough. This pattern could repeat itself.

This is not to fixate on the back-and-forth politics of the US-China relationship, but anyone trying to accurately reflect trade tensions in asset prices should be aware that there could be many twists and turns to come.

For one, this time, focusing exclusively on talk about tariffs would be a mistake. Trade restrictions do not have to apply to all a country’s products to damage markets.

The US and China have both expanded their tool kits to fight the trade war. The conflict is simultaneously incredibly wide and intensely targeted. Other grand strategic issues – like North Korea and China’s overseas investment – are certainly on the table in negotiations.

At the same time, actions targeting specific companies or even specific products (notably through the US’ entity list to bar exports to certain Chinese companies) will grow more prominent in the dispute.

Collectively, this leaves policymakers trying to reach a deal inside a thorny thicket – no matter which way they turn, someone is likely to get pricked. The longer policymakers delay a resolution, the more markets will be the ones feeling those thorns.

On top of trade politics, a more modest growth environment than last year already signals slower trade growth in 2019. Declining business investment and cooling trade are not a good signals for markets, even as tensions wane.

Hannah Anderson is a global market strategist at JP Morgan Asset Management

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