Will a Trade War Crash Emerging Markets?

The short term looks uncertain, says Neptune’s Ewan Thompson, but China and emerging markets should prosper even amid a trade conflict

David Brenchley 12 July, 2018 | 2:28PM

Chinese Ship Trade War

A potential escalation of trade tensions between the US and China is worrying in the short term, but won’t lead to a crisis in emerging markets, according to Neptune’s Ewan Thompson.

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, adds that 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.”

US Should 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.”

Thompson’s fund has produced returns since inception in September 2008 of 149%, double that of its benchmark MSCI EM Index and ahead of its Investment Association sector’s average of 120%. In the year-to-date, it has also lost less, -3.05%, than its benchmark, -5.77%, and sector, -5.18%.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Neptune Emerging Markets C Acc GBP1.47 GBP-1.71

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk