Investors Skeptical About Stock Rally as Trade-War Era Begins

(Bloomberg) -- Stocks may be up today, but analysts and investors are skeptical that the rally will last as the U.S.-China trade war begins.

While the MSCI All-Country World Index climbed and Asia's benchmark rebounded from a nine-month low, market watchers are seeing more volatility in the cards. With U.S. tariffs on $34 billion of Chinese goods now in effect and China retaliating, expect a long process of back-and-forth between the two countries with no clear endgame as of yet, they say.

“These tensions are like an ongoing chronic back pain,” Tai Hui, chief market strategist at JPMorgan Asset Management in Hong Kong, wrote in a note on Friday. “Investors may not notice for a while, but they can come back and haunt us.”

He recommends going for shares of companies less exposed to global trade and that will benefit from rising local consumer demand.

Asian shares have suffered the most in anticipation of the tariffs, with markets from Shanghai to Tokyo -- and even Ho Chi Minh City -- tumbling this week. Nine out of the world's 10 worst-performing stock indexes in the four days through Thursday were from the region.

While the MSCI Asia Pacific Index rose 0.6 percent on Friday, it's still down for a fourth week, its longest streak in more than a year. In the U.S., the S&P 500 Index is up after two weekly slides, and the Stoxx Europe 600 Index has rebounded from an almost three-month low on Monday.

“It's a short-term rally after bad news was digested and portfolio de-risking trades were executed,” said Alan Richardson, investment manager at Samsung Asset Management in Hong Kong. “The rally is unlikely to sustain because growth has peaked and we are unlikely to see new highs this year.”

The main question is how the U.S. will retaliate to China's response. President Donald Trump suggested duties could reach $550 billion of imports, a figure that exceeds all of U.S. goods imports from China in 2017. Commerzbank analysts including Alexander Kraemer see a complete backing down by Trump as “close to impossible” ahead of mid-term elections in November.

“The trade friction-related rhetoric could continue for longer, continuing to put pressure on the region's valuations in the near term,” said Manishi Raychaudhuri, BNP Paribas's head of equity research in the Asia-Pacific region. “However, markets are cheap relative to their historical ranges, and may not decline much from the present levels.”

Like JPMorgan Asset Management's Hui, Raychaudhuri favors stocks linked to domestic economies, particularly those in the consumer-discretionary and financial sectors. He also likes energy and commodity companies, especially oil exporters, according to emailed comments.

Aviva Investors Global Services responded to the threat of protectionism by cutting its overweight on emerging-market equities to neutral and taking an overweight stance on U.S. shares and the dollar.

“While we must not dismiss the risk of rising tension over trade -- President Trump's ‘America First' policy could be a disruptive factor for the next two years,” Michael Grady, senior economist and strategist at the fund manager, wrote in a note. “We view these developments as volatility events that can be weathered as long as they do not derail the global recovery.”

And volatility is exactly what Ardea Investment Management's Tamar Hamlyn plans to take advantage of. The Sydney-based money manager said his firm is buying interest-rate options and credit-default swaps to take advantage of rising market swings.

“Tariffs ultimately impair international trade, and thus can act as a brake on global capital flows,” he said. “Without the stabilizing influence of global capital flows, we can expect volatility in financial markets to increase, and funding costs to rise as well, especially in the short end.”

--With assistance from Fox Hu, Ruth Carson and Moxy Ying.

To contact the reporter on this story: Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cecile Vannucci, Paul Dobson

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