Investors should re-evaluate country concentration
The implications of the potential of a continuing trade war between the US and China should make investors re-evaluate the degree of country concentration in their emerging-market equity exposure, according to Parametric.
Also, the firm said the consequences for China, the US and other emerging market countries would differ, and might be compared to a “domino effect”.
According to Parametric’s head of investment strategy, Tim Atwill, China would see serious ramifications of the trade war while the US would only experience moderate implications of such a scenario.
At the same time, other emerging market countries would see varying consequences.
“The US-China trade war could further slow China’s economic expansion, which was already showing signs of fatigue thanks to the central government’s attempt to deleverage the country’s precarious financial system,” he said.
Atwill also stressed that to respond to the consequences of a further escalation of the trade war, Chinese authorities could open the nation’s monetary spigots to provide a temporary growth spurt. However, this would further amplify the perils of its overleveraged financial system.
The other step the authorities could take would be devaluing the yuan versus the dollar, helping China’s exporters, but providing economic stimulus again might lead to devaluation which could result in capital flight by mainland investors, undercutting economic stability on many fronts, the firm said.
As far as the implications for the US were concerned, tariffs would be similar to the impact of a tax increase on consumer-spending habits.
“Given the rather abundant fiscal stimulus measures currently in place, this would essentially take a ‘very strong’ growth story in the US to simply a ‘good’ growth story. To the extent the stimulus is priced into stock prices, though, we would expect a falloff in US equities,” Atwill said.
At the same time, the emerging market economies, given their reliance on the US consumer, would need to consider reduced US consumption as well as any tariffs that could directly impact their exports.
“These impacts are tough to puzzle out due to the interaction between the various countries’ trade flows and the myriad tariffs programs put into place,” Atwill said.
“However, they would undoubtedly require a reconsideration across emerging market equities, with different markets reacting to reflect each country’s unique trade situation.”
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