Asia Stocks Pricing in 20% Chance of Serious Trade War, UBS Says

(Bloomberg) -- Asian stock markets are pricing in the probability of a more serious trade dispute causing an earnings recession at about one in five, according to a UBS Group AG study.

This week’s escalation in tension between the U.S. and China, which led to declines in equities on Monday and Tuesday, has seen equity investors increase their expectations of that becoming a reality by about 9 percent, strategists including Niall MacLeod wrote in a report. A full fledged trade war could see stocks in Asia tumble 30 percent from this year’s peak, they said.

“This suggests that if our base case plays out, and calm is restored, current sentiment is likely pricing in too harsh an outcome,” the strategists wrote in a note to clients Wednesday. However, “clearly a more negative outcome is far from being priced in.”

The analysis by UBS compared current multiples of Asia ex-Japan equities with “normal” levels, as well as periods when the region’s exports fell. While the bank’s core forecast is that a serious escalation of trade disputes is likely to be avoided, a trade war that sparks an industrial production recession could see earnings fall 15 percent to 20 percent, according to the study.

Investor concerns about a budding trade war intensified this week when President Donald Trump said he directed the U.S. Trade Representative to identify $200 billion worth of China goods for additional tariffs. China labeled the move “extreme pressure and blackmail,” and said it would retaliate with counter measures.

For the moment, the strategists remain overweight North Asian equities, which they see as more exposed to trade and cyclical companies, according to the note. A “serious supply chain disruption” would flip this preference to South Asian shares, which are more domestically orientated, it said.

To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Adam Haigh, Andreea Papuc

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