They say wars are easy to start and difficult to end, and that increasingly looks the case when it comes to the US-China trade dispute. It’s now 18 months since US president Donald Trump levied his first tariffs on Chinese imports, and there’s little sign of a truce around the corner. But as with so many geopolitical events of late, advisers looking at their portfolios could be forgiven for occasionally wondering what the fuss is about.
US equity indices have continued to lead the pack over the past year and a half, as Chart 1 shows. Hong Kong benchmarks have produced mediocre returns, but that is par for the course in recent years. Yes, mainland Chinese shares have struggled – the Shanghai Composite is down more than 10 per cent since hostilities commenced – but few if any clients will have material exposure to these stocks.
Is this, then, another much-talked-about event that intermediaries can simply shrug off? The answer may not be quite as simple as advisers hope; there are reasons to think the trade war will exert an ever-greater hold over investors and their portfolios in the months ahead.
For starters, some of the previous tailwinds have now receded. One policy that helped prop up risk assets in the first half of last year in particular was president Trump’s sizeable corporate tax cuts. Shorn of such benefits in 2019, US corporates are having to deal with the consequences of an escalating series of levies.
The president has repeatedly said that it is China, rather than the US, that will pay the price of the trade war. But his administration’s recent decision to increase tariffs on $250bn (£196bn) worth of Chinese imports from 10 per cent to 25 per cent is having an impact domestically.
The International Monetary Fund noted in May that US importers of Chinese goods were already raising consumer prices in addition to taking a hit to their own profit margins. The New York Federal Reserve said in the same month that the tariff hike would cost US households a collective $106bn a year.
The US is not the only victim of these salvoes. In China, unsurprisingly, “there has been a clear hit to both export and import growth since the US first imposed tariffs”, says Chris Iggo, head of fixed income at Axa Investment Managers. Gauges of Chinese manufacturing activity, which had recovered at the start of the year, fell notably again in May as the latest round of tariffs had an immediate effect.
Europe, meanwhile, has also seen a reversal of fortunes for its export-focused economic powerhouses of old. A slowdown in Germany has been in train for several months, though domestic sectors have hitherto remained relatively well insulated. But with no end to the trade tensions in sight, eurozone policymakers are now starting to wonder how long this divergence in economic performance can last.
These concurrent challenges have contributed to a global economic slowdown and even raised the spectre of a global recession. Those concerns produced the fourth-quarter market slump that left clients’ 2018 portfolio statements looking distinctly underwhelming. Risk assets’ renewed fall in May can also be laid at the door of the president’s latest tariffs. For advisers, trade tension – once something they could happily ignore – is becoming the defining external force on their portfolios.