Institutional investors across Asia are growing more vocal in expressing fears about global trade tensions and macroeconomic uncertainty, with some reducing risk asset exposure and growing more cautious on deal-making.

Heavyweight Singaporean asset owners are certainly worried about the harm that a prolonged trade war could do to investment prospects, as the US proposes considers further tariffs on Chinese goods (see box below).

“As a global investor, we are concerned about escalating frictions in international trade and investment arrangements,” said Lim Chow Kiat, chief executive of sovereign wealth fund GIC, in its annual results release on July 13.

Lim Chow Kiat, GIC

“In view of the high asset valuations, the increased risk of monetary policy tightening across different jurisdictions and the elevated uncertainty, we maintain a cautious investment stance,” he added.

In the year ended March 31, GIC had already cut its allocation to developed market equities by 4 percentage points to 23%, while raising private equity and nominal bond and cash exposure by 2 percentage points each to 11% and 37%, respectively.

Meanwhile, Singapore state investor Temasek suggested in its 2018 annual review last week that it could slow its pace of deal-making over the next 18 months. It also set out several economic scenarios of which it is modelling the potential impact on returns, one of which is a global trade war.

TRADE WAR RISKS RISING

US President Donald Trump’s growing list of tariffs on goods from countries from China to Canada is fuelling fears of tit-for-tat measures by other nations. That could harm global economic prospects and drive up inflation as consumers pay higher prices for traded goods.

President Trump

The risk of trade tensions escalating further is the greatest near-term threat to global growth, said the International Monetary Fund (IMF) this week in its latest World Economic Outlook report.

If the trade policy threats are realised, global output could be about 0.5% below current projections by 2020, the IMF said, adding that the cost to the global economy could reach $430 billion

After Washington imposed 25% tariffs on $34 billion of Chinese goods on July 6, Washington has now proposed introducing 10% tariffs on a further $200 billion of imports. Beijing is expected to respond with more measures of its own and this week said it had filed a further complaint with the World Trade Organization against the US actions.

The trade frictions come at a time when the US is tightening monetary policy by steadily raising interest rates and rolling back quantitative easing.

Moreover, relatively high oil prices – Brent crude stands at around $73 a barrel, compared with $48 a year ago – could add to inflationary pressure in emerging markets.

Throw in domestic policy risks in markets from India to Argentina – and it all adds up to a situation that is making investors very nervous.

Singapore's markets regulator and central bank has also pitched in. On July 4, as the latest US tariffs were about to be implemented on July 6, Ravi Menon, head of the Monetary Authority of Singapore, said in a speech: “The world has clearly moved from trade tension to trade conflict.

“The threat of further escalation is beginning to dampen business confidence and unsettle financial markets,” he added. “If this escalates into a trade war, all three engines of global growth – manufacturing, trade and investment – will stall.”

Indeed, Singapore would be one of the Asian countries (other than China) most affected by both US tariffs on Chinese goods and Chinese tariffs on US goods, according to UK fund house Schroders (see figures below).

Top 10 markets most affected by Chinese tariffs on US goods via supply chains (% of market GDP affected)
(Click for full view; Source: Schroders)
 
Top 10 markets most affected by US tariffs on Chinese goods via supply chains (% of market GDP affected)
(Click for full view; Source: Schroders)

 

Investors outside Singapore are also worried.

Kylie Willement, chief investment officer for the Pacific region at consultancy Mercer and manager of the Mercer Super Trust, said this week that her firm had become more cautious in recent months.

She pointed to trade tensions, signs of slowing global growth and political uncertainty in Europe. “Risk feels like it is more skewed to the downside than it was six months ago,” she told AsianInvestor.

Similarly, Park Dae-yang, CIO at the $12 billion Korea Teachers’ Pension Fund, told AsianInvestor that growth momentum was set to slow in the coming months as a result of rising economic volatility thanks to monetary policy normalisation in developed markets, and the trade war, especially between US and China.

That slowdown is likely to influence the performance of KTPF, which has nearly half of its portfolio in foreign assets: 40% in bonds and equities and 7% in alternatives.

Ernest Chan contributed to this story.