Shutting out trade-war noise, even for long-term investors, looks increasingly like a tall order.
That’s especially true as investors bailed out of global equities Thursday, and sought safe haven assets on the growing realization that the trade spat between the U.S. and China could stick around for a while. That shift in mind-set is at the heart of our call of the day, provided by banking giant Nomura.
“Altogether, the U.S.-China relationship has moved further off track over the past two weeks after a period of what appeared, on the surface, to be steady progress toward reaching an admittedly narrow agreement,” said a team of analysts at Nomura, led by Lewis Alexander, in a note to clients.
“We do not think the two sides will be able to get back to where they seemed to be in late April,” said the analysts, who now see a 65% chance that President Donald Trump will move ahead with 25% tariffs on $300 billion of Chinese products by the end of this year.
“The macroeconomic and financial market impact of the U.S.-China trade conflict thus far has been modest, lowering the threshold for implementing additional tariffs,” it said, adding that the urgency for a near-term deal seems to be fading as both sides dig into their respective positions.
Nomura doesn’t expect tariff escalations between now and June, when Trump and China President Xi Jinping are due to meet at a G20 gathering (Note, they warn the two may not even meet up). But neither do they see tensions easing off, predicting a final round of U.S. tariffs in the third quarter of this year, followed by China retaliation. The bank isn’t alone as JPMorgan Chase has also told its clients to brace for additional tariffs at the end of June.
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“Without a clear way forward during an intensifying 2020 U.S. presidential election, we see a rising risk that tariffs will remain in effect through end-2020,” said Nomura.
Neil Wilson, chief market analyst at Markets.com, told clients Thursday that “risks to the downside are building and equity markets probably need to reprice to reflect the heightened risks from the deterioration in trade.”
He said that adjustment for more trade-tension risk could mean lower returns and weaker corporate profits amid some “pretty pessimistic” growth forecast due to tariff worries. “I also think we should note that utilities, real estate and staples [companies that produce goods that are always in demand] have been the big strong performers this year, so that would be a trend to see continue,” Chase said.
Jeroen Blokland, Robeco portfolio manager, said his firm shifted to neutral on equities after Trump’s tweet earlier this month that tipped off fresh trade tensions.
He remains a fan of U.S. stocks because he says they remain a global leader when it comes to company earnings growth, however there’s a caveat: “If there is a meaningful de-escalation or trade deal relatively soon then the anticipated uptick in global growth and hence earnings can continue.
“In this scenario the growth gap between the U.S. and rest of the world is expected to decrease and the U.S. dollar could peak. This will help rest of the world equities relative to the U.S.,” Blokland told MarketWatch.
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