Almost 18 months since it began in earnest, the US-China trade war remains one of the biggest causes of uncertainty " and sleepless nights " for investors as they seek to navigate an environment of slowing growth and increasingly volatile markets, according to analysts and investment strategists.
That may not change next year, even if US President Donald Trump fails to secure re-election to the White House, analysts said.
Belinda Boa, head of active investments for Asia-Pacific and chief investment officer for emerging markets at BlackRock, said the world's biggest asset manager is being "far more cautious" as it looks ahead to next year and believes geopolitical risks, including the trade war, will be the "key driver" for the economy and markets in Asia next year.
"Trade policy is and has been increasingly unpredictable and we've seen a surge in trade protectionism," Boa said. "This deviates from decades of globalisation and of free trade. We're moving in a very different direction."
Of more than a dozen market strategists interviewed for this story, a majority remained positive about equities generally, including Chinese stocks, in 2020, given the low interest-rate environment and an expected recovery in corporate earnings next year. They warned, however, that returns could be "modest" or "moderate", saying the trade war and the US elections were among the biggest risks to markets next year.
"When we think about how we live our lives, whether it's how we educate our children, whether it's how we travel, whether it's how we do business, this is a move away from globalisation and we don't think that it's going to stop," Boa said.
She said BlackRock expects more "modest" returns for investors next year as the macroeconomic environment further weakens. Recession risks could also rise later in the year as the US-China relationship and the American elections in 2020 create further uncertainty, according to BlackRock.
Since July of last year, the US has placed tariffs on hundreds of billions of dollars of Chinese goods as President Trump tries to force Beijing to change decades of industrial and trade policies. It is one of the few areas that attracts bipartisan support in an increasingly polarised political environment in Washington.
President Trump announced a "substantial phase-one deal" between the countries in October, but no agreement has been signed as sticking points remain over whether the US will rescind tariffs on Chinese goods, as well as purchases of American agricultural goods by China.
Top negotiators from both countries spoke by phone this week to discuss their core concerns and try to keep communications open. President Trump also told reporters earlier this week the sides were in the "final throes" of negotiating a deal, sparking optimism among investors.
But, Hong Kong has become a potential flash point in the discussions after President Trump signed into law on Thursday legislation that could make the government subject to diplomatic action and economic sanctions, brushing off warnings from Beijing about interfering in its affairs. If no agreement is reached, further tariffs are set to go into place on December 15.
The dispute between the world's two biggest economies has weighed on business investment and global commerce, with trade contracting by 1.3 per cent in September, the latest data available, according to the CPB Netherlands Bureau for Economic Policy Analysis.
Pascal Blanque, group chief investment officer at asset manager Amundi, said the decline in trade is causing a "major change" in the structure of growth globally, but does not point to a "full-blown" recession next year, particularly as the US and China appear to be moving closer to a partial trade deal.
Shipping containers from China and other Asian countries are unloaded at the Port of Los Angeles as the trade war continues between China and the US, in Long Beach, California on September 14, 2019. Photo: AFP alt=Shipping containers from China and other Asian countries are unloaded at the Port of Los Angeles as the trade war continues between China and the US, in Long Beach, California on September 14, 2019. Photo: AFP
"Monetary and fiscal policy combination, a prominent theme going forward, may extend the current cycle further," Blanque said. "While the noise on trade-related issues will be high, a material escalation is unlikely given the upcoming US elections in 2020. However, the path for investors will not be linear.
"In the short term, market expectations for policy actions have gone too far and need to be adjusted. The adjustment process will drive volatility in bonds, with a bottoming out of core bond yields having already started, and re-rating in some expensive defensive sectors in equity."
Timothy Moe, chief Asia-Pacific regional equity strategist at Goldman Sachs, said optimism in the market had been growing that a partial phase-one deal can be reached, rising from a 10 per cent to a 15 per cent chance in the summer and then climbing further, to a 70 per cent chance recently.
"The point here is that the market has already reflected optimism about a deal and, therefore relative to the actual news flow, the way the market is likely to respond to that news flow is arguably negatively skewed," Moe said. "In other words, if we have good news, the market probably is flat to up somewhat. If we have bad news, there's a lot of price gains to give back."
" Donald J. Trump (@realDonaldTrump) November 17, 2019
Steven Oh, the global head of credit and fixed income at asset manager PineBridge Investments, said the "most significant headwind" to the global economy this year has been the escalation of the trade war, as well as regional political risks such as the United Kingdom's move to exit the European Union. Political risks will linger next year and have the potential to "quickly shift investor sentiment", Oh said.
"Rising discontent in developed countries stemming from income inequality is leading to more populist governments and nationalism, which fuels protectionist policies that hinder global trade," he said. "This is a trend that is unfortunately likely to continue, irrespective of which parties emerge victorious."
Mark Haefele, chief investment officer for UBS Global Wealth Management, and Min Lan Tan, head of its Asia-Pacific chief investment office, said an escalation of tariffs this year has caused "heightened investor anxiety", but the dispute is not likely to become a "full-on cold war".
"The relationship between the US and China may never be the same. Patience for Beijing to acquiesce to Western rules has run out in the US, and China is unlikely to jettison its governance model to appease the White House," Haefele and Tan said in the firm's "Year Ahead 2020" report.
"A confrontational stance against China has gained bipartisan support in the US, making it likely that the spat started by the Trump administration will continue into the coming years regardless of the party in power. Likewise, President Xi's proclamations that China will not bow to foreign pressure have made it difficult for the central government to backtrack and agree to key US demands without 'losing face.'"
That said, the UBS strategists said they expect more complicated issues between the two countries may be pushed down the road, allowing gradual progress to be made over the course of 2020 and a de-escalation of tariff issues.
Eric Moffett, portfolio manager at T. Rowe Price's Asia Opportunities Strategy, said he has been avoiding companies and sectors that can fall victim to US-China issues because of the uncertainty it creates.
"We have a very interesting internal debate here. I think there is a bull case one could spin that a trade deal, even a watered down one, could be very good for markets if it involves those tariffs coming down," Moffett said. "Conversely, you could argue that some of the difficulties in the relationship may persist. And so when I invest, I try to invest away from that macro and in things that are not so sensitive to US-China trade."
Moffett noted that valuations of Asian equities remain "reasonable" relative to the rest of the world and historic levels.
Kevin Anderson, head of investments, Asia-Pacific, at State Street Global Advisers, said the asset manager is having to make "very careful decisions" in today's markets, but believes there are opportunities for investors as economic growth is expected to be resilient next year as central banks take more dovish policy stances.
"At the end of 2019 we are in a late cycle. We are beset by continuing political uncertainty and unconventional policy," Anderson said. "In short, the waters that we have to navigate are getting choppier and more turbulent but in order to reach the long term outcome for investors that we strive [for], quite simply the only way to navigate through this cycle, the only way out is through."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.