Container ships sit moored next to shipping containers and gantry canes at the Kwai Tsing Container Terminals, operated by Hong Kong International Terminal (HIT). (Photographer: Anthony Kwan/Bloomberg)

Easing Trade War in 2019 Seen Sparking Emerging-Market Rally

(Bloomberg) -- Some of the world’s largest money managers are positioning for a dialing-back of global trade tensions next year, heralding a rebound for emerging markets.

The breakthrough reached Sunday by the U.S., Canada and Mexico is helping generate optimism about a truce between the world’s two largest economies next year as tariffs take their toll on both countries. That could spell relief for assets from Argentina to Turkey and Brazil that have been battered by the escalating feud between Donald Trump and Xi Jinping.

A deescalation with China may come in the middle of 2019, according to Mohammed Apabhai, the head of Asia trading strategy at Citigroup Global Markets in Hong Kong. By then, the Trump administration will have maxed out tariffs on more than $500 billion in Chinese goods and retaliatory measures by Beijing could start to hurt the U.S. economy and stocks. Neither country wants that, so they could be pressured to make a deal, he said.

Any good news on trade means “emerging markets will bounce quite hard,” Apabhai said.

Tensions between Washington and Beijing flared last week after the Trump administration’s 10 percent tariff on about $200 billion of Chinese goods took effect. Xi’s government responded with duties of its own on $60 billion in U.S. products, adding to concern that there will be no near-term resolution for the trade war. In fact, the Chinese have said they prefer to delay talks until the U.S. midterms conclude in November, putting greater stakes on a potential Trump-Xi meeting at the G-20 summit in Argentina later that month.

While talks between the two sides figure to be more contentious than those with North American negotiators, the new Nafta pact shows it’s possible for the Trump administration to resolve disputes even amid sour personal relations.

Easing Trade War in 2019 Seen Sparking Emerging-Market Rally

“The breakthrough with Canada will put fresh pressure on China, which is facing a clear weakening of its manufacturing sector,” said Stephen Dover, the head of equities at Franklin Templeton in San Mateo, California. “I think the U.S. and China will be back at the negotiating table later this fall, with signs of progress on market access for key American sectors such as financial services.”

‘Economic High’

U.S. economic expansion will slow to 2.5 percent next year from 2.9 percent in 2018, according to the median forecast of more than 60 economists surveyed by Bloomberg, while China’s will decelerate to 6.3 percent from 6.6 percent.

The dent on growth in both economies as well as pressure from consumers and business groups could hasten a trade deal, according to Teresa Kong, the head of fixed income at Matthews Asia in San Francisco. Almost 69 percent of U.S. businesses operating in China oppose using tariffs as a weapon, while just 8.5 percent support them, a survey of 434 respondents in April and May by the American Chamber of Commerce in Shanghai showed.

“When the repercussions start to take a toll on the economy, Trump might consider pulling back,” said Kong, adding that a decline in the S&P 500 Index would probably be the leading indicator.

That’s similar to the view of Chen Wenling, the chief economist at Beijing-based China Center for International Economic Exchanges, a think tank led by retired senior officials.

“The trade war can’t last long given the impact on U.S. consumers,” she said. “The U.S. is riding an economic high given the positive impact from the tax cut and the stock market rally, but it’s a distorted view.”

Trump will also be gearing up for his 2020 reelection race and the prospect of a deal that could be branded as a win for the U.S. business community may be too tantalizing to pass up, according to analysts and investors.

Rally Time

That would be welcome news for emerging-market fund managers, who’ve watched stocks slump into a bear market and currencies from Argentina to Turkey to India slide to record lows this year on the backdrop of a strong dollar, rising U.S. interest rates and escalating trade disputes.

MSCI’s developing-nation stock index dropped 1.2 percent at 2:52 p.m. in New York Tuesday amid a cocktail of weak data, trade angst and echoes of past European debt crises.

“Any indication that the U.S. and China are resolving trade differences would likely be good for EM assets,” Asian stocks in particular, said Kathy Jones, the chief fixed income strategist at Charles Schwab in New York.

High-yield emerging-market debt would likely get a boost from easing trade tensions after this year’s underperformance, according to Shamaila Khan, the director of emerging-market debt at AllianceBernstein in New York.

That said, the general consensus in Washington and Beijing is that trade will remain a key cog in their long-term strategic rivalry, so a truce may not last.

“It’s plausible that an agreement can be reached some time next year on a narrow set of issues,” said Isabelle Mateos y Lago, the chief multi-asset strategist at BlackRock Investment Institute, the asset manager’s think tank in New York. The outlook for emerging markets will depend on the growth momentum in the U.S., Europe and China, she said. “As long as these regions keep growing at a healthy clip, EM should be fine.”

©2018 Bloomberg L.P.