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Strategists see U.S.-China trade dispute as an investment opportunity in emerging markets

posted onNovember 16, 2018
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The U.S.-China trade spat has cast a shadow over equities in Asia for much of 2018 with the MSCI Asia ex-Japan index down more than 20 percent. 

So far, the US has already imposed tariffs on US$250 billion worth of Chinese products, and has threatened tariffs on US$267 billion more. China, for its part, has slapped tariffs on US$110 billion worth of US goods, and is threatening qualitative measures that would affect US businesses operating in China.

But the trade war has also created buying opportunity for China stocks in recent months with foreign investors buying into mainland shares through Stock Connect, the trading link connecting bourses in China and Hong Kong.

Analysts are arguing the recent financial downturn of the Asian markets presents an opportunity for investors to involve emerging markets into their portfolios at a discount. 

Given the MSCI Emerging Markets Index has had growing returns since 2015, with a return of 37.28% in 2017, it's no surprise strategists see potential during this turmoil. 

emerging markets

Suresh Tantia, investment strategist at Credit Suisse, says that he sees investment opportunities in China, Singapore and Indonesia.

"I think China, Singapore, Indonesia, all these markets look quite interesting," he told CNBC on Friday.

Following media reports that Washington and  Beijing have intensified efforts to strike a truce at the G20 Summit that would curb their trade war, Tantia said this is a good time to buy into Chinese equities.

US President Donald Trump is expected to meet his Chinese counterpart Xi Jinping  on the sidelines of the G20 summit in Buenos Aires at the end of this month. It will be the two leaders’ first meeting since a tit-for-tat trade war between their nations broke out in July. 

"Our view has been that President Xi and President Trump will agree on some kind of framework under which they will hold the negotiation and this agreement could come at G-20" Tantia explained.

Tai Hui, chief market strategist, Asia Pacific, at J.P. Morgan Asset Management is of the same opinion. 

“While we are still cautious over a full resolution of recent tensions in the medium term, resumption of dialogue between Washington and Beijing would be good enough to investors for now,” Hui told Reuters earlier this month.

“Combined with the prospects of more economic stimulus from China and reasonable valuations in Asian equities, investors could use this opportunity to reload on emerging market and Asia assets,” he added.

With respect to Singapore, Tantia said that if a truce will take place between the world's two largest economies, then “Singapore market could actually start to outperform". 

About Indonesia, where in September the rupiah hit two-decade lows and the government unveiled a raft of measures to shore up the currency, Tantia said the efforts have started to bear fruit. 
"I think the Indonesia market could continue to outperform, given that valuation is still, you know, quite reasonable, the earnings growth is much more healthy looking at 10 percent kind of growth over the next 12 months," he said. 

In the first half of this year, China has seen $43 billion of inflows from foreign investors, thanks partly to the inclusion of China A shares — stocks of mainland companies that trade on the Shanghai and Shenzhen exchanges — in global and regional indexes by index giant MSCI

On Tuesday, MSCI said it would add several onshore Chinese stocks to its emerging-markets index. The changes will take effect at the end of November. 

US President  Donald Trump and Chinese
 US President Donald Trump and his Chinese counterpart Xi Jinping Photo: Reuters

Trump hints at end of tariffs

A  Reuters report on Wednesday said that China had sent a written response to U.S. demands on the ongoing trade negotiation, giving hopes to investors that the two superpowers might bring an end to the spat.  
 

On Thursday, the Financial Times reported that representatives for US President Donald Trump and his Chinese counterpart Xi Jinping have intensified efforts to strike a deal following a phone call between the two leaders earlier this month.
 

Trump on Friday said that Washington may not impose any more tariffs on Chinese imports. The American leader also stated Beijing is willing to make a deal, but that the US doesn't find it acceptable yet.

All eyes for sure will be on the G20 summit in Argentina.