America’s growing concerns over the alleged theft of its intellectual property by Chinese companies has allowed a slowburning trade war between the two countries to escalate, leaving global markets in a state of unease. 
Last week, US president Donald Trump announced his plans to impose a further $100bn of tariffs targeting the Chinese economy, following a back and forth between the two countries that began in January this year. China has threatened to respond with retaliatory measures, which has seen volatility soar in markets and uncertainty rise among investors.
“The timing of this uptick in trade aggression appears timed with the run-up to the US midterm elections. Hence why Trump needs to appear to be doing all he can to protect his core voter’s interests,” said Brooks Macdonald investment director Edward Park.
He continued: “The US would argue that China’s infringement of intellectual property rights is already effectively ‘cheating’ the free trade agreement. Therefore their tariffs are designed to either bring China to the negotiating table to negotiate truly free trade going forward or to impose barriers of their own to find an equilibrium.”
However, Matthews Asia’s investment strategist Andy Rothman believes the proposed tariffs will have little impact on China and are likely to have a more damaging effect on the US.
“Net exports – the value of exports minus the value of imports – account for only 2 per cent of China’s GDP. In contrast, domestic consumption accounts for the majority of China’s economic growth and more than half of its GDP.”
Rothman added: “About two-thirds of the 25 largest exporting companies based in China are foreign-owned. Moreover, one-third of the value added from all Chinese exports actually accrues to other countries, including US partners such as Japan, South Korea, Taiwan and Germany, as well as to American companies.”
Stock markets took a plunge after the news broke with the S&P 500 and the Dow Jones Industrial Average down more than 2 per cent at the market close on Friday.
“When the two biggest economies in the world go head-to-head on trade, no one should be surprised financial markets do not like it,” said Joseph Amato, president and chief investment officer – equities at Neuberger Berman.
Beginning in April last year, Trump ordered an investigation into steel imports to the US. The result estimated that between $225-600bn of US intellectual property was being stolen each year through Chinese trade malpractices.
After months of threats, the US imposed tariffs on exports from the Asian superpower in January, with steel, aluminium, solar panels and washing machines being the most heavily affected. The ensuing tit-for-tat has led to both countries proposing duties worth over $50bn until last Thursday’s announcement.
Despite increased uncertainty, Brooks Macdonald’s Park is not overly worried about the global equity markets.
He explained: “More broadly we believe the backdrop for equities is still positive with US corporate earnings expected to grow by circa 30 per cent over the next 12 months.
“Current equity valuations mean that for an economy in good health with strong earnings growth, the stock market looks attractive.”
However, investors do not appear to share the same confidence.
Volatility was already heightened after strong US employment figures sparked fears of higher-than-anticipated inflation leading to faster interest rate hikes by the Federal Reserve.
Recent concerns over an escalating trade war have done little to subdue investor confidence to the low levels seen last year.
Performance of the VIX over 1yr
Source: CBOE
As such, Brooks Macdonald’s Parkhas voiced some concerns over the conflict should the tariffs materialise.
“Should there be a further escalation and the proposals turn into actual tariffs then the fine-tuned supply chains that exist will be disrupted causing damage to global corporations,” he said.
“A negotiation would undoubtedly be a market friendly outcome but there is certainly an increasing risk that tensions escalate towards a more comprehensive trade war.”
Craig Farley, co-manager of the Ashburton Chindia Equity fund, said he has employed a number of different strategies to limit the impact of a more comprehensive escalating trade war.
“As of now, the model favours domestically-focused, cyclically-geared China exposure, with a focus on consumer discretionary, banks and real estate companies,” he explained.
“In addition, we implemented a protection strategy – in the form of Hang Seng China Enterprises index put options and VIX call options – in early February and this remains in place today.
“We are also holding approximately 8 per cent cash in our portfolio, which we anticipate deploying into stocks at more attractive levels.”