Are EM investors overestimating the potential of a trade war?

Author: Regina Chi

April 13, 2018

Escalating trade tensions between the U.S. and China have investors in emerging markets on edge, but fears of an extended pullback in EM stocks may be overblown. While rhetoric between the two countries has ramped up, there is strong incentive on both sides to forgo further retaliatory tariffs in favour of more conciliatory negotiations that can lead to a fair agreement between them.

During a recent roundtable discussion with my colleagues, it was agreed that the likelihood of a full-blown trade war remains low despite the tit-for-tat tariffs announced so far to date. There is a sense that much of what has transpired is a type of brinksmanship borne from President Trump’s well-worn “art of the deal” tactics and China’s unwillingness to show weakness in the face of it.

Both countries have something to lose by becoming overly aggressive with their stance. This includes a potentially big hit to farmers in the U.S. and the possibility of significant job losses across China’s manufacturing sector. This should be incentive enough to start working together more constructively, but China’s position as the largest marginal buyer of U.S. debt in the world may be what eventually gets them to the table.

The Chinese government currently owns well over US$1-trillion in U.S. treasuries, dwarfing President Trump’s recent threat to add $100 billion of tariffs on top of the initial round of $50 billion announced in late March. Moreover, China is expected to be an important buyer in any incremental U.S. debt issued to fund the U.S. government’s massive new tax reform.

Our base case, therefore, is that China continues to take a measured approach with the U.S., resulting in a long, drawn out mediation process not unlike the renegotiation talks for the North American Free Trade Agreement (NAFTA), now in its seventh month and ninth round without a deal.

This scenario will likely continue to prompt periods of heightened volatility in the weeks and months ahead leading to further pockets of weakness for EM stocks. As a whole, however, emerging markets are far better positioned to absorb these types of shocks than in the past and they should continue to grind higher based on attractive valuations, relatively strong earnings and economic growth that is supportive of higher multiples in the future.

Regina Chi is a vice president and portfolio manager at AGF Investments Inc. She is a regular contributor to AGF Perspectives.

Commentaries contained herein are provided as a general source of information based on information available as of April 10, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.


AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
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