Schroders: China Shares Won't Be De-railed by Trump Tariffs

Schroders' Jason Yu says protectionism will increase market volatility but the fundamentals remain strong for Asia equities

Emma Wall 20 June, 2018 | 10:37AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Schroders' Head of Multi-Asset Product for North Asia, Jason Yu.

Hello, Jason.

Jason Yu: Good morning.

Wall: So, it's been a difficult start to the week for Asian equities. Trump has threatened even greater trade tariffs impacting us here in Asia. Do you think this is a bump in the road for Asian equities or do you think this is the beginning of the unravelling of the great gains that we saw in 2017?

Yu: Our view is that we believe there are a few reasons that lead us still to believe that fundamentally emerging markets are still very sound. The reason being that we still see long-term structurally positive benefits from emerging markets, including population, demographic dynamics, which is very favourable for emerging markets, as well as all the natural resources in land that emerging markets have compared to developed markets.

So, we do believe that's why the trade policy rhetoric has spooked the market volatility. But overall, we believe that fundamentals in emerging markets are still very sound.

Wall: This geopolitical risk is not something that's new this week though, is it? It's something that you have been monitoring for some time and considering when making asset allocation decisions?

Yu: Yeah, Emma, you are absolutely right. So, we've been monitoring a scenario, which we call, the rise in global protectionism since last year. The reason is because we started to observe that there are some tensions in terms of the trade policies between the US as well as China along with other countries as well. So, from a multi-asset investing perspective, we do pay attention to those what we call dynamic forward-looking scenarios where we actually analyse the impact potentially to the global GDP as well as the impact on the inflation per se.

Wall: However, it must be very difficult to know with any certainty what the future holds, particularly in this tariff scenario. China may come back with some revenge tariffs, Trump could hit back again. So, I suppose there's a little bit of kind of ignoring the noise. It must come in when making investment decisions?

Yu: Absolutely. As I mentioned, the rhetoric has definitely spooked the market volatility. But the truth is that none of us have the perfect insight into how the endgame will transpire. I think that's just the truth. So, what we can do is to continue to focus on our research, on fundamentals; continue to monitor all the different themes that we have in the portfolio; continue to have a sense of all the different risks that might potentially impact emerging market growth and inflation as well as the rhetoric and the direction of travel between the trade policy negotiation between the US and China. These are all the important things that we do from a multi-asset investing perspective.

Wall: I suppose it's worth noting that if we were having this conversation in 2008 – that was when the global recession was – but, I mean, 10, 20 years ago, it would have much bigger impact on China. China is increasingly reliant on itself for growth, both economic and indeed stock market growth and the surrounding Asian countries. So, while the US is one of the largest economies in the world, increasingly, China is less reliant on to it?

Yu: Yes, absolutely right. So, when we look into the potential impact of this trade policy, what we call, again, the rise in global protectionism, the truth is that the impact for China as well as for the US is quite limited compared to their overall aggregate GDP. But that rhetoric has definitely impacted on to the global sentiment of investments. And you are absolutely right, Emma, that China is not the China 10 years ago. So, if we look at the allocation that we have in the emerging market portfolios, we do like China A Shares given the potential of growth going forward for China's economy as well as the recent inclusion of MSCI for China A shares to be part of the MSCI Index. So, we do continue to see very growth potential for China and China is definitely not a China 10 years ago.

Wall: Jason, thank you very much.

Yu: Thank you very much, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.


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Emma Wall  is former Senior International Editor for Morningstar

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