Asian stocks look set for further losses amid investor fears that the US-China trade war will escalate, combined with other concerns, such as disappointing corporate earnings figures.

As of Friday (July 6), when the US’s latest tariffs on Chinese imports took effect, the MSCI Asia Pacific Index (which includes Japan) had shed 13% from its peak on January 26.

Despite a 1.3% rebound yesterday hinting a slight easing of worries, widespread bearish sentiment suggests regional equities have further to drop, with American president Donald Trump threatening more action against China.  

“It wouldn’t surprise me if emerging Asia stocks fell another 5% to 10%,” said Richard Titherington, head of emerging market and Asia-Pacific equities at JP Morgan Asset Management. “That wouldn’t be historically unusual,” he told AsianInvestor, pointing to the macroeconomic backdrop.

Trump: ramping up rhetoric

On top of the rising trade tensions, the US Federal Reserve has been tightening monetary policy, and the dollar has been strengthening, he noted. “That confluence of events has historically been problematic for emerging markets,” said London-based Titherington.

The Fed is expected to hike interest rates three more times this year and twice in 2019, said UK fund house Schroders in a research note last week. The dollar has risen since late January against a basket of major currencies, having steadily weakened since late 2016.

EARNINGS DISAPPOINTMENT

Moreover, emerging market earnings figures have been disappointing, said Titherington, as is inevitably the case after stock markets rise substantially and expectations are revised upwards as a result.

“Much of the fall in [EM] equities is not just down to concerns about trade and the rising dollar, but companies producing worse-than-expected earnings,” he noted. “A combination of high multiples and lower-than-expected earnings is very toxic.”

Earnings growth for Asia is expected to be around 14% in 2018, based on the MSCI EM Asia Index, said Titherington.

Richard Titherington, JPM AM
“In 2017 everyone was pretty optimistic about the fact that we wouldn’t have a surge in protectionism, but that story has turned around this year,” he noted. “People are very concerned [about the escalating trade war], especially in respect of [its potential impact on] China.”

London-based Titherington said local Chinese investors in particular were very worried.

China’s CSI 300 benchmark has plunged 21% between January 26 and July 9 (see also figure 1). Vietnamese stocks have taken an even bigger hit from EM contagion fears, falling 30% from an April 6 record high, having gained some 50% since late September.

On February 6, Titherington had said the MSCI Asia-Pacific index could shed 10% to 30% in a "long-overdue" correction, after a week in which Asian stocks had fallen sharply.  

Figure 1: Chinese stocks suffering
(click for full view)

Others struck a similarly downbeat tone about trade tensions.

Laurent Clavel, head of macroeconomic research at Axa Investment Managers, said in a note last week: “While we had considered US trade rhetoric to be part of a (broadly successful) policy to gain trade concessions from other countries, the past few weeks suggest that protectionism will rise by more than we had hoped.”

OUT OF CONTROL?

Clavel added that Axa IM is “considering the risks that such escalation could get out of control, which would deliver a severe to the global economic outlook by reversing almost a century of trade opening”.

 

The US imposed around $32 billion worth of tariffs on a list of Chinese products from July 6, and a further $14 billion of tariffs are set to be implemented at a later date.

China has responded by publishing its own list of US exports that will be targeted for tariffs, with a secondary set for implementation if the US proceeds with its final $14 billion.

Trump, who is scheduled for a visit to the UK starting Thursday (July 12), has also suggested that any retaliation will result in a broadening of 10% tariffs to a further $200 billion worth of Chinese exports.

“The direct impacts of this broadening may still be relatively small,” wrote Clavel, “but the associated disruption to global supply-chains and tightening in global financial conditions risks a more material impact on US and global growth.”

He added that “beyond misguided considerations of bilateral tariff reduction, the US measures against China look increasingly like ill-fated attempts at economic containment”.

Indeed, despite the big focus on China, other EM economies may suffer almost as much from a trade war, wrote Craig Botham, emerging markets economist at Schroders, in a note last week.

US tariffs on Chinese goods are likely to hit Asian countries – such as Taiwan, Malaysia, Singapore, Korea and Hong Kong – particularly hard, said the note (see figure 2 below).

Figure 2: Asia taking a big hit 
(click for full view)

“The immediate damage is focused chiefly on EM Asia,” wrote Botham, “while relatively closed economies such as Brazil and India should be more insulated than other economies in the event of a more global trade war.”

All this being said, big market falls mean it may be time to start buying again.

JP Morgan AM had been trimming positions in financial stocks across Asia late last year and early this year, and following a heavy sell-off in the sector, Titherington sees opportunities there, as well as in some technology names.