THE RECENT VOLATILITY IN THE ASIAN MARKETS
By Nicola Beswick
For the full 2018 Financial Year, we saw Asian markets (MSCI AS Far East Ex Japan) return 14.57%. However, as the trade war between the US and China has become more heightened, Asian markets have retreated. For the last three months the same indices returned -4.54%, to the end of 31 July 2018.
The trade war being the main cause of this change. To date, the U.S. has so far imposed levies on $50 billion on Chinese goods, with Beijing retaliating by also placing levies on $50 billion of U.S. goods.
Late last week, President Donald Trump indicated that he wanted to impose tariffs on a further $200 billion worth of Chinese imports, as soon as possible. The US public have a ‘public-comment’ period, where they can voice their comments on the proposed tariffs, which range from 10% to 25% on a wide range of consumer goods. The deadline is 6 September 2018.
China is proposing to respond to this second round of tariffs with another $60 billion of tariffs on US exports.
Interestingly, recent data from China’s official factory gauge indicated strengthening in the Chinese economy, signalling that there may be some resilience in the Chinese economy. On the 31st of August, the released data showed that the manufacturing Purchasing Managers Index (PMI) was at 51.3 for the month, compared to 51.2 in July. The non-manufacturing PMI, which looks at services and construction, increased to 54.2, compared with 54 in July. A PMI of 50 and above means there is growth, while a PMI below 50 implies contraction.
The Chinese share market hasn’t been the only market to come under pressure from these tariffs. The S&P 500 Index has also experienced a volatile time. Late last week, the S&P 500 Index, the Nasdaq Composite and the Dow Jones Industrial Average all extended losses, with industrial stocks among the worst performers.
Dr Mary Manning, the portfolio manager for Ellerston Asian Investments (EAI), one of our preferred investments in the Asian sector, recently wrote about this trade war and provided readers with a snapshot of three potential scenarios for these trade wars, and the likelihood of each. These scenarios are:
- Negotiation – where China concedes in some peripheral areas, with no impact to their key plans. The timing of this scenario occurring has likely passed, and we are now on the following, second, scenario;
- Escalation – Both the US and China impose tariffs. This is not an ideal scenario for either country, as it creates uncertainty. This is what we see now.
- Extreme Retaliation – under this Scenario, China employs further economic measures in response to the US tariffs, including purposely depreciating their currency, imposing travel restrictions and creating further red-tape for US-based companies trading in China.
While President Trump’s final decision on these latest round of tariffs have not been made, it is possible that the tariffs may be imposed in waves. It is unlikely the trade war will end quickly, as the US want to ensure that China does not overtake their current economic position in the world economy.
We view that this will continue to create further volatility within the share market, particularly within emerging markets and companies, such as the resource companies, that have a reliance on the Chinese economy.
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