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Trade War Leading to Global Recession? ETFs in Focus

Sweta Jaiswal, FRM
Markets closed in the green on Monday after President Trump announced that he was suspending plans to impose tariffs on Mexico.

Trump has been firing in all directions to defend his America First agenda. From China to Mexico, India to Turkey, several countries have faced Trump’s new trade-related policies over the past month, straining their trading ties with the United States. This has resulted in weaker currencies, soft economic growth and slashed forecasts for the countries at the receiving end.

In fact, Chetan Ahya, chief economist and global head of economics at Morgan Stanley, expects ongoing Sino-US trade spat to lead to recession within a year if the  trade war worsens. Meanwhile, Goldman Sachs  bank slashed its growth forecast for the United States for the second half of 2019 by about half a percentage point to 2%.

Current Trade Scenario

Trump dealt fresh attacks in the latest round of the trade spat. The American President increased tariff to 25% from 10% on Chinese goods worth $200 billion effective May 10 midnight, and has threatened to levy another 25% tariff on an additional $325 billion of Chinese goods. In retaliation, China seeks to impose as much as 25% tariff on U.S. imports worth $60 billion, effective Jun 1. Goldman Sachs expects Trump to impose 10% tariffs on the remaining Chinese imports worth $300 billion and on all Mexican goods too.

Additionally, Trump has banned Chinese firm Huawei Technologies and 26 of its affiliates from doing business with American companies, though it has provided a 90-day exemption.

After imposing fresh set of tariffs on China, Trump has been in a trade conflict with Mexico. He recently announced tariffs on all goods imported from Mexico in order to put a check on illegal immigration. Trump said that the first round of tariffs would begin on Jun 10 at 5% (read: After China, US Hits Mexico With Tariffs: ETFs Under Threat).

Not only Mexico, Trump is soon going to revoke preferential trade status for India and take away India’s privilege to export some products to the United States, without paying any U.S. duty. Notably, the preferential trade treatment under the Generalized System of Preferences program made it possible for India to send $5.6 billion worth of duty-free exports to the United States. In its move to take action against the unfair trading practices with certain countries, Trump had also ended Turkey's preferential status.

If speculations are to be considered, China is planning to strike back by imposing a ban on rare-earth minerals export to the United States. China can also go to the extent of restricting U.S. firms manufacturing machinery and electronics within Chinese regions from easily accessing rare-earth materials (read: What's Behind the Recent Surge in Rare Earth ETF?). 

If we go by The New York Times article, there are chances of America limiting China’s access to its stock markets. Thus, with the looming uncertainty over a truce between the economies, one may feel the urge to opt for safer investments.

Trade War Impact on Asian Markets

Ever since the trade war has intensified with Trump’s tweet on May 5, investors have been grappling with bleeding Asian stock markets. In fact, the NIKKEI 225 Index has lost 8.3% over the past month. Hong Kong’s Hang Seng Index and Shanghai Composite Index have also lost 7.9% and 0.6%, respectively.

Most of the Asian markets had to deal with cooling manufacturing activity. Per a Reuters article,Purchasing Managers’ Index’s (“PMI”) were below 50-point mark in Japan, South Korea, Malaysia and Taiwan. The PMI lagged the forecasts in Vietnam. In fact, latest data showed that South Korean exports declined 9.4% in May in comparison to a median forecast for a 5.6% fall.

HSBC economist Jingyang Chen, analyzing the situation, believes that “Beijing will double down on easing for the private corporate sector.”

ETFs in Focus

Against this backdrop, we discuss some bond ETFs which might face difficulties in the trade tumult.

iShares Asia 50 ETF AIA

The fund seeks to match the price and yield of the S&P Asia 50, before fees and expenses. The Index measures the performance of the 50 leading companies from Asian countries. The ETF holds 51 stocks in the basket. The fund’s AUM is $1.02 billion and expense ratio is 0.50% (read: Markets & ETFs Digest Trade Spat: Is It a Dead-Cat-Bounce?)

iShares MSCI Mexico ETF EWW)

The fund seeks to match the price and performance of the MSCI Mexico IMI 25/50 Index, before fees and expenses. The ETF holds 56 stocks in the basket.The fund’s AUM is $809.2 million and expense ratio is 0.47% (read: Trump Proposes 2020 Budget: ETFs to Top & Flop).

iShares MSCI Japan ETF EWJ

The fund seeks to match the price and performance of the MSCI Japan Index, before fees and expenses. The ETF holds 323 stocks in the basket. The fund’s AUM is $12.51 billion and expense ratio is 0.47% (read: Japan's Economy Beats Growth Forecasts: ETFs in Spotlight).

Reality Shares Nasdaq NexGen Economy China ETF BCNA

This fund seeks long-term growth by tracking the investment returns, before fees and expenses, of the Reality Shares Nasdaq Blockchain China Index. It comprises 40 holdings. The fund’s AUM is $2.1 million and expense ratio is 0.78% (read: China Disappoints With Sluggish Numbers: 5 ETFs in Focus).

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iShares MSCI Mexico ETF (EWW): ETF Research Reports
 
iShares MSCI Japan ETF (EWJ): ETF Research Reports
 
iShares Asia 50 ETF (AIA): ETF Research Reports
 
Reality Shares NASDAQ NexGen Economy China ETF (BCNA): ETF Research Reports
 
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