China vs. US: Trade war or war of words?

What the sabre rattling is all about?

China’s tit-for-tat reprisals clearly caught markets by surprise last week. With Chinese exports to the US being 4 times bigger than US exports to China, China seems to have the most at stake in a quid-pro-quo process. Still, we think the most likely outcome is that both parties will start a prolonged negotiation process, not an outright trade war.  Keep in mind that very little has happened yet in terms of concrete action–it is still a war of words. Although president Xi offered little in terms of genuine news in his widely followed Boao speech on 10 April, China’s more conciliatory tone recently might be an early indication that this war of words will not transform into a trade war.

That said, when it comes to goods, trade uncertainties are unlikely to fade before the US mid-term election. Longer term, however, the core of the matter is not the rust belt, it is the protection of intellectual property. This particular issue is more structural in nature as it relates to China’s ambition to become a world leader in tech, e.g. artificial intelligence. Tech stocks have been leading equities higher in the current bull markets, and many believe that whoever wins the technology race will also win global economic leadership. Therefore, the transfer of intellectual property from the US to China is taking centre stage. Ultimately, it is about who will be the world’s leading economy in 10 years’ time.

How does this affect the bigger macro picture?

The hay days of fast-growing trade are over and a more hawkish tone on trade policy in general is here to stay, we believe. The most important take-away is that yesterday’s globalisation winners will not be in the driving seat in the future. It is important to note that global trade intensity (trade/gdp) already peaked a few years ago. Protectionist measures were on the rise way before the recent trade tensions escalated. On top of this, technological progress (robotics) is making insourcing of production more favourable. So a less trade-friendly environment is not new in itself. But for many years, trade has contributed to strong global growth; in the same way “peak trade” is now contributing to the low growth environment we are in.


Figure 1: Global growth becoming less trade-intense

image

The market impact: Signal or noise?

From a market perspective, we think the worst case of an outright trade war will be avoided–but this doesn’t mean business as usual; the average level of protection is likely to rise on a more structural basis. We have moved passed peak trade.

The uncertainty stemming from the war of words on trade policy is not the root course of disappointing YTD performance for risk assets, but it is adding to the woes. The core reason for the general risk-off mode, as we see it, is the tightening of monetary conditions in combination with a market priced to perfection. The world’s most important central bank is hiking gradually and money market financing is becoming more expensive as US dollar liquidity is becoming scarce. This is the real issue that should keep investors awake at night. Keep in mind that the recent widening of Libor-OIS spreads amounts to an additional 1-2 hikes from the Fed.  Monetary headwinds are gathering pace, and the market is beginning to take notice. That said, if we see an outright trade war in terms of concrete action taken, it could be the straw that ultimately breaks the camel’s back for (already wounded) equity bulls.

About Nordea Asset Management
Nordea Asset Management (NAM, AuM 223.6 bn EUR*), is part of the Nordea Group, the largest financial services group in Northern Europe (AuM 330.4 bn EUR*). NAM offers European and global investors’ exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.

Nordea Asset Management has a presence in Cologne, Copenhagen, Frankfurt, Helsinki, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Sao Paulo, Singapore, Stockholm, Vienna and Zurich. Nordea’s local presence goes hand in hand with the objective of being accessible and offering the best service to clients.

Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.

*Source: Nordea Investment Funds, S.A., 25.01.2018

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and representative offices. This document is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest key investor information document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden, Finland and Luxembourg respectively. The Legal Entities’ branches, subsidiaries and representative offices are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds, S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and representative offices. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same, but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or representative offices.

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