The trade war between the USA and China is continuing. The summit of the Asia-Pacific Economic Forum recently came to an end without a joint final declaration. This was justified on the grounds of differing views on trade issues, in particular in the USA and China. More and more companies are also considering relocating their production and supply chains from China and the USA. The Asian specialist Matthews Asia is now talking about the first signs of “panic” in the Asian markets.
Falling share prices – nevertheless positive long-term prospects
“Prices are starting to fall in India, Japan has recently shown weakness, and now the overpowering S&P 500 is also experiencing strong fluctuations,” says Robert Horrocks, Chief Investment Officer (CIO) of Matthews Asia. From the CIO’s point of view, the sell-off in the markets will be supported by outflows from exchanged traded funds (ETFs). For long-term investors, however, the lower entry prices offer good opportunities: “Valuations for shares from the Asia-Pacific region (excluding Japan) have fallen to a price-earnings ratio of 12 and are at a 30% discount to the United States”.
Horrocks sees the reason for the market fluctuations not only in the trade war and its headlines. While tariffs are affecting the mood, companies and supply chains are adapting. “The impact of tariffs remains subordinate to monetary policy,” Horrocks continues. “The US Federal Reserve continues to tighten. It could even accelerate the tightening if core inflation continues to rise. In China, the domestic economy is slowing for domestic reasons, less because of the trade conflict”.
Opportunities for investors
Investment opportunities are now offered by companies whose share prices have fallen below the long-term intrinsic value. This strategy offers the investor more value for money. In the long run, however, earnings growth in Asia will remain more positive than in the West. Especially as GDP growth in Asia is likely to remain higher than in any other region in the long run.
Matthews Asia sees a reversal of employee-friendly policies in Asia and expects a shift away from ultra-liberal, business-friendly policies in the US. However, Asia must continue its reforms. “A return of China to a state-led economy could be counterproductive for productivity growth,” Horrocks said. He advises investors not to be infected by the panic and not to abandon their long-term considerations.
Relative winners of the trade conflict
The Japanese Nomura Bank instead sees opportunities for Asian countries in the trade war. According to the Japanese investment bank, certain companies could benefit from short-term import substitutions in which expensive imports are replaced by cheaper articles from other countries. Relative winners include Nomura, particularly Malaysia, followed by Japan, Pakistan, Thailand and the Philippines.
“In the short term, higher reciprocal tariffs between the US and China will increase incentives for companies to replace these expensive imports with locally produced goods or from other countries,” a recently published analysis of products on the tariff lists says. Malaysia is expected to benefit from growing demand for electronic components, liquefied petroleum gas and communications equipment.
Relocation of production could also have a positive impact. Vietnam is the clear winner if companies relocate production and foreign direct investment (FDI) from China – followed by Malaysia, Singapore and India. Although Pakistan is one of the biggest beneficiaries of import substitution, it benefits least from diversification of production and FDI. Of the 13 countries in the analysis, Bangladesh, India and South Korea benefit least from import substitution.