U.S. President Donald Trump and China President Xi Jinping behind him. (Photographer: Qilai Shen/Bloomberg)

Epic Stock Rally in Asia Pummeled by Trade War Escalation

(Bloomberg) -- The start of this year was epic for Asia’s stock markets as investors priced in hopes that the U.S. and China would continue making progress in talks on trade, leading to some kind of truce. That flipped 180 degrees last week as tensions between the world’s two largest economies escalated.

  • The region’s benchmark index, which climbed 12% through to its April peak, has dropped 5% since then.
  • Japan’s Topix index also climbed more than 9% in the same time frame and then erased more than half of that rally, with a bulk of its drop coming last week. 
  • Japanese stocks posted their worst weekly decline since December and the MSCI Asia Pacific had its biggest drop since October.
  • Indonesia’s Jakarta Composite Index erased this year’s gain with a 1 percent loss on Monday.

Only China, Hong Kong, Australia and New Zealand’s stock markets still show double-digit growth among Asia-Pacific countries, though Chinese stocks were the world’s worst performing last week.

“The market was being a little bit complacent about the trade risks that were out there,” said Kerry Craig, global market strategist at JPMorgan Asset Management. “We still think there’s scope for disappointment for investors on the trade deal,” he said.

Read more: Markets Still Seen Pricing in U.S.-China Trade Deal in Weeks

Epic Stock Rally in Asia Pummeled by Trade War Escalation

Last week’s U.S.-China trade rift extended into the weekend with back-and-forth contention between the Trump administration and China. The emerging stalemate in U.S.-China trade negotiations grew out of an earlier deadlock over how and when to remove existing American tariffs that provoked Beijing to threaten to walk away from talks.

And the slump is set to continue after China struck back Monday with plans to raise duties on some American imports starting June 1, defying a call from U.S. President Donald Trump to resist escalating the trade war. After Trump said he’d meet his Chinese counterpart Xi Jinping at next month’s G-20 summit, the world’s largest economy released a list of about $300 billion worth of Chinese goods that it plans to levy tariffs of up to 25%.

Buy The Dip?

Equity valuations have dropped recently though most strategists aren’t calling for a buy-the-dip scenario. The price-to-earnings ratio for blended forward 12 months on the MSCI Asia Pacific has dropped to 12.7 times compared with a 2019 high of 13.3 in April, data compiled by Bloomberg show. That’s still far from the December low of 11.5 after the year-end rout.

“I think its probably too early to buy again,” said Nick Twidale, chief operating officer of Rakuten Securities Australia Pty in Sydney. “There is room for a further correction in the market before we get to a stage where investors will look to buy again,” he said, citing the latest weekend news on U.S.-China trade relations.

Epic Stock Rally in Asia Pummeled by Trade War Escalation

For Jeffrey Halley, market strategist at Oanda Asia Pacific Pte., stocks may look cheaper now but it could be a case of “catching a falling knife.” Stock markets globally “have traded on optimism and hope, rather then reality. Further deterioration in trade relations could see equities reprice much lower yet,” he added.

Stay Nimble

“It is important for equity investors to stay selective and nimble in the current environment,” said Corrine Png, regional head of equities research at AIA Investment Management Pte. Ltd. Sectors with structural growth drivers and companies with earnings mainly driven by domestic consumption will be more resilient through this, she said.

Linger for Longer

Still, trade negotiations and investors concerns will “linger for a lot longer,” JPMorgan’s Craig said. “There’ll be something else that grabs your attention and trade will go away. The difference this time will be that there’s that clear signal that markets shouldn’t be complacent, but shouldn’t factor in that everything will be resolved if a deal is announced,” he added.

“It is impossible to determine if the situation will improve in the near term until we get more clarity on the progress or not of the talks,” said Oanda’s Halley.

There are things to be optimistic about. Dovish central banks could continue to prop markets up and China’s stimulus has helped keep the market buoyant. China economic data set to come through this week, like industrial production and retail sales, could also give markets a boost -- if the numbers are strong.

“Even though we’re seeing declines in the market over the last week or so, the declines are much more muted than what we’ve seen in past because two of those pillars are still in place,” Craig said.

©2019 Bloomberg L.P.