BlackRock, the world's largest asset manager, on Monday downgraded emerging market equities linked to China for the second half of the year, saying markets were "overly optimistic" about China's ability to boost its economic growth amid the trade war with the United States.
The firm, which manages more than US$6.5 trillion in assets, said it now sees "trade and geopolitical frictions as the principal driver of the global economy and markets" and expects China's economy to experience "a lull" from the effect of US tariffs.
As recently as a month ago, New York-based BlackRock had a positive view of emerging market equities, saying "economic reforms and policy stimulus" could support the stocks.
It had argued that "improved consumption and economic activity from Chinese stimulus could help offset any trade-related weakness".
But the firm has now changed its viewpoint largely because the year-old US-China trade war has become the single most important factor in the global economy and marketplace, it said in its Midyear 2019 Global Investment Outlook, released on Monday.
The US and China are now locked in a strategic competition that is structural and persistent, BlackRock's researchers said.
The tensions go beyond trade, extending to a race to dominate next-generation technologies with implications for national security.
"China's growth is finding its footing but looks to be at risk of staying sluggish due to the tariff fallout," said Jean Boivin, head of BlackRock Investment Institute, which provides insights on the global economy and asset allocation to help clients and portfolio managers navigate financial markets.
While Boivin said he expects Beijing to be "quick to roll out fiscal stimulus to help underpin growth if the economy wobbles", he said any stimulus will be "to stabilise growth, but not to accelerate it".
Although it has a positive second-half view on US stocks, BlackRock now advises investors to avoid emerging market equities. It recommends they instead "dial down overall risk by raising some cash".
While Chinese policymakers are expected to revert to trusted tools to boost growth, such as infrastructure spending and other fiscal stimulus, Boivin said that a significant monetary easing or sharp currency depreciation was "unlikely".
Such measures "would run counter to Beijing's prime objective to maintain financial stability and prevent a rerun of the destabilising capital outflows seen in 2015-2016", he said.
The fallout from the trade war would be a potential rollback of the decades-long globalisation trends in China that gradually lowered inflation and expanded corporate profit margins.
If the result were a supply shock for which markets were not prepared, it could lead to negative returns in both equities and bonds, the researchers said.
A port and logistics hub in Lianyungang, Jiangsu province. The tensions between the US and China go beyond trade, extending to a race to dominate next-generation technologies. Photo: EPA-EFE alt=A port and logistics hub in Lianyungang, Jiangsu province. The tensions between the US and China go beyond trade, extending to a race to dominate next-generation technologies. Photo: EPA-EFE
"Yet we see the gradual opening up of China's onshore markets " and their increasing weight in global bond and equity indexes " as important sources of diverse returns for investors in the medium term," Bartsch said.
Despite the weakened outlook for China, BlackRock still sees investment opportunities in emerging markets such as Brazil.
The firm also downgraded its global growth outlook for the second half of the year, saying the trade war could further weaken spending.
BlackRock cut its global growth forecast last year as the trade war picked up steam.
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.