US trade policy remains firmly front and centre, stirring up memories of a boxing bout as punches fly, hitting not only trading partners, but also financial markets. Concerns can be said to deepen as both sides’ measures – either ‘merely’ announced or implemented – appear to hit sentiment, at this stage more so on the company and political front, and affecting consumers less directly.
But still. With trade tariffs now openly deployed as a lever to tackle issues beyond ‘unfair practices’, ‘national security’ or ballooning deficits and including cross-border migration, market participants could not be blamed for opting for safe havens or choosing to stay on the sidelines.
Not a one-off?
The sense that things might have to get worse before they get better is borne out in recent economic data. Surveys of (US) purchasing managers have signalled more gloomy sentiment, making it harder to argue that the drop seen in April was just a blip (see exhibit 1). One caveat would be that this data concerns business sentiment. It remains to be seen how this translates into the real economy. Will actual capital spending, investment and hiring, for example, be put on hold?
Exhibit 1: US PMI – April’s drop does not look like just a blip
Source: FactSet, BNP Paribas Asset Management, data as of 3 June 2019
In China, arguably the prime target of the current trade war, business sentiment has also taken a knock. Purchasing managers’ indices have remained on a southerly trajectory, although it must be said this is the case for the – more export-sensitive – manufacturing sector more so than – domestically focused – services businesses where sentiment has been stable in recent months.
The need to tread cautiously
Looking at hard economy data, GDP growth has slowed in China, but we believe this was caused mainly by government efforts to contain credit growth and encourage deleveraging. Conversely, one could argue that this has left Beijing with added scope to stimulate the economy financially, but such measures would entail risks such as an increase in the amount of underperforming bank loans amid little room for profitable investment (in growth) at this point.
In terms of Chinese exports to the US, these outstrip the value of US exports to China by far and while consumer goods account for the bulk, capital goods come second and industrial goods third. Prices of (imported) consumer goods would rise if the full weight of the tariffs were brought to bear, but perhaps more worryingly, US (tech) companies importing intermediate goods would have to find alternative sources for these inputs. This could well be costly and time-consuming. Rather than to the benefit of US manufacturers, remaking the supply chain could turn out to be a shot in the foot.
Exhibit 2: China sales are generally low, but growing fast
Source: FactSet, BNP Paribas Asset Management, data as of 31 May 2019
Growth rates matter more to the stock market than direct sales exposure
In a further twist, trade barriers could hinder US sales to China, robbing companies of a growth source that was outshining domestic or other foreign sales, especially in the consumer discretionary and tech sectors. That threat to growth rates is a risk to US equities. In that sense, the stock market exposure to the mushrooming trade fight is bigger than that of the economy as a whole, even if sales to China account for only 4% of total sales and exports account for only 0.9% of the whole economy.
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