US-China trade dispute deepens

China has announced that it will impose tariffs on USD60bn of US goods from 1 June, three days after the US doubled tariffs on USD200bn of Chinese imports.

The trade escalation sent global stock markets down. Both the Dow Jones and S&P 500 recorded their biggest losses since January this year, while Asian shares fell in morning trade.

What does this mean for investors?
Comments from our experts:

“There is no change to my earlier view that the China-US trade issue will dominate investor sentiment for some time, and the key is that the longer-term relationship between the two nations is likely to be blurrier, without clear collaboration or cooperation between them.

"In the shorter-term, we expect markets to remain volatile. It is not necessarily negative for investors, given the opportunity set that arises due to volatility, and we’ve been factoring its potential impact in assessing individual, stock-led opportunities.”
Jing Ning, Portfolio Manager, Fidelity China Fund

“The US-China trade issue will keep on oscillating and is expected to remain an overhang for the market, which in turn is likely to result in market volatility.
Our funds are generally not exposed to export-related names, and we continue to focus on fundamentals, and be overweight more domestic-oriented sectors.”
Catherine Yeung, Investment Director, Asian Equities

“The trade war is indeed affecting market sentiment, which has been reflected in the market over the past few trading sessions. The weakness of China’s equity market and the Chinese currency may continue, should the sentiment continue to deteriorate.
In our global multi asset income strategy, we had already closed our CNY position before last week’s trade war escalation. In our Asian-focused multi asset income strategies, we had also significantly reduced our CNY exposure prior to last week.

The current bearish sentiment may actually present buying opportunities, provided that the trade war rhetoric does not affect the fundamentals. We are closely monitoring the impact on economic fundamentals.

The impact from the trade war itself is relatively limited, compared with the size of China’s GDP and the size of China’s recent stimulus measures. China has the ability to act by cushioning the trade war impact with policy tools - and a deterioration of the trade war will lower the threshold for its willingness to act.

Compared to 2018, China is more prepared, as it is stimulating its economy through both fiscal and monetary measures. Onshore corporate bond spreads have stabilised while external funding costs have meaningfully eased. This time around, negative sentiment from a deteriorating trade war narrative does not coincide with a credit crunch.
China also stepped up its measures to support private companies, which are a key driver of China’s GDP growth and employment. We could see policies further promoting the liquidity flow to small and medium-sized enterprises. Such action should be supportive to our allocation in Asia/China High Yield. We could also see more helpful fiscal measures, such as tax reductions and fee cuts.

Additionally, we are also monitoring the trade war impact on inflation, which could be felt across both the US and China.”
George Efstathopoulos, Portfolio Manager, Multi Asset

 “For China, the impact of a 25% tariff rate on an additional USD325bn of goods would shave off around 1-1.1% from China’s GDP for the next 12-18 months. In relation to the trade front, headline risk remains high while negotiations intensified, especially after the recent rally.

Overall, the news related to trade protectionism will lead to pockets of volatility, although considering the supportive macro fundamentals, this will likely present itself as potential buying opportunities, subject to careful issuer and security selection.

The intensified trade retaliation would likely push China to look inwards, in order to maintain social and economic stability, which is likely to lead to more targeted easing. Recently, the China National People's Congress confirmed that it will continue its monetary support and additional fiscal support, together with initiatives to boost domestic demand.
Bryan Collins, Head of Asian Fixed Income

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

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