A new wave of US tariffs on $300bn of Chinese goods announced last week marked an escalation in the trade dispute which remains a key concern for the management teams we meet across all markets. 
Exports have in many cases become less competitive, consumers have faced rising prices and companies have been forced to revisit complex production lines in response to tariffs on imported raw materials and components. But, as with many things, the impact will vary by country, industry and company.
It is said, there are no winners in war, and at first glance, the ongoing saga between the US and China seems no different. Global economic activity indicators have slipped to their lowest levels since early 2016 and the latest macro data out of China shows growth has slowed to levels not seen since the 1990s. Exports, a key driver of the Chinese economy for the past few decades, fell 1.3 per cent year-on-year in June, highlighting the direct impact of the escalating tensions.
However, to suggest that there are no winners – or at least no potential beneficiaries – of the escalating tensions may be incorrect. As bottom-up investors, our ability to identify those businesses that are well-positioned to weather the trade war disruption could, therefore, present interesting investment opportunities, despite the turbulent backdrop.
Substitutes for Chinese exports to the US
The first category of winners would be those trading partners that are able to offer substitutes for previously imported Chinese products.
Take, for example, the first round of tariffs that came into effect in July 2018 and focused on $34bn of sophisticated manufacturing goods. This led to a decline in Chinese exports of such products to the US of 17 per cent year-on-year, compared with an 11 per cent year-on-year increase the year before. Given the higher value-add nature of these products, it was predominantly developed market companies, in countries like Germany, France and Canada that were the main beneficiaries, alongside those in Mexico.
The subsequent $200bn list, which came into force in September 2018, was much more broad-based and consumer-focused, covering a range of products from electronics and appliances through to foodstuffs. As such, it tended to benefit more emerging market countries, most notably Mexico, the Philippines, Taiwan and Vietnam.
It remains somewhat more of an existential question, but long-term, should we see more meaningful disruption in global supply chains off the back of these tensions then there will also be an opportunity to benefit from re-offshoring from China. Countries that can offer a stable political environment, an abundance of cheap labour and a foreign investor-friendly environment with improving ease of doing business and intellectual property protection should be best placed to benefit. We believe India and Indonesia, which host newly re-elected reformist governments, are best placed to reap such gains.
Substitutes for US exports to China
The second category of winners is those countries standing to benefit from an uptick in trading with China. For example, soybeans where China imports close to $15bn from the US each year. The 25 per cent tariff imposed by China in retaliation to US protectionist measures, coupled with a bumper harvest in South America, has seen Brazilian and Argentine exports of the legume to China soar. Soybeans cover close to half of Argentina’s cultivatable land and related products account for over a quarter of the nation’s exports. Similarly, pork supplying nations such as Denmark, Germany and Spain could benefit from tariffs on US pork products. Finally, retaliatory tariffs from China on US products could also benefit manufacturers of automobiles, fuels and plastics in major exporting markets for these products.
Beneficiaries of the Chinese policy response
The final category would be those companies best placed to benefit from the Chinese government’s domestic policy response. To counterbalance the negative impact of slowing export and consumption growth the Chinese government has shifted stance towards decidedly more dovish monetary policy. The central bank has cut the reserve requirement ratio (RRR) five times over the last 12 months and provided additional liquidity for private enterprises through improved availability for bank loans, as well as debt and equity financing for the sector. The fiscal response has been equally strong with a series of tax cuts, increased infrastructure spending and financing support to SMEs (small- and medium-sized enterprises). This approach is different to prior scenarios – for example, the gross capital formation led expansion following the financial crisis – in that it is more private sector and consumer-orientated. While that means it is a more gradual stimulus, it should be supportive for SMEs and consumer companies in China, as well as select infrastructure-related projects.
As well as these short-term measures, the recent challenges have, in our opinion, also reinforced the view in China that it must continue along the path of meaningful supply-side reform and service sector deregulation. This is evidenced by the continued willingness to open up and offer increased market access in the financial and manufacturing sectors, the further liberalisation of domestic capital markets and the focus on gradual adjustments in legislation related to intellectual property protection. If these continue, they could over time help level the playing field for both Chinese private-sector businesses operating against undue state-supported competitors, as well as international firms looking to enter the domestic market. For those who have a history of good capital allocation discipline, strong brand recall and are able to adapt to the Chinese market this could be a significant opportunity.
Lastly, while export-driven sectors could be hurt by higher tariffs, some technology and industrials companies are emerging as global innovation leaders. Again, the recent trade tensions have only reinforced China’s belief that it has to continue its focus on moving up the value chain. This long-term transition towards a more innovation and consumer-led economy should create significant investment opportunities in areas that cater to the growing domestic demand base. This includes more spending on healthcare and insurance due to the rapidly ageing population, banking needs driven by rising incomes and urbanization trends and household appliance upgrades as consumers increasingly demand more sophisticated products.
As bottom-up stock pickers, we would always caution against trying to time markets by betting on binary geopolitical events. And, in that regard, we have no view on how the US-Sino tensions will ultimately play out. However, by focusing on company-level fundamentals, looking past the near-term noise and recognising the multitude of potential opportunities that derive from such disruptive events, we believe we can identify extremely attractive risk-return opportunities.
Luke Barrs is head of fundamental equity client portfolio management for Europe, Middle East & Africa at Goldman Sachs Asset Management. The views expressed above are his own and should not be taken as investment advice.