Are we heading into a second trade war?
President Biden has introduced new tariffs on Chinese exports, increasing the selling price of Chinese solar energy components and electric vehicles in the US. It all brings back memories of the trade war that Trump started back in 2018.
While it might seem aggressive to impose tariffs of over 100% on electric vehicles, they’re likely to have only a very limited impact – China accounted for just 2% of total electric vehicle imports into the US in 2023. So the move is more of a preventive measure by Washington, as part of its plans to reindustrialise the US economy. In fact, with less than six months to go before the election, the main goal of the tariff hikes was probably to appeal to US voters. While it’s still unclear who will win the upcoming election, bipartisan support for further de-globalisation is likely to grow, and more measures could well be brought in against China in the months ahead.
So how have the Chinese stock markets reacted to the news? Chinese equities currently seem to be less sensitive to bad news than in recent years. After the Hong Kong index dropped sharply in mid-March, there has been a timid yet solid rebound, with the index gaining more than 30% since its end-January low. This is partly because there are signs that the economy is stabilising. It’s by no means a V-shaped recovery, but it doesn’t look like things will get worse at this point. The latest economic readings show that industrial output was up by over 6% year on year, although retail and property sales remain sluggish and are still holding back the recovery.
The increase in stimulus measures brought in by the Chinese government has also helped to drive up domestic equities. Although it’s not quite been the tidal wave of stimulus that investors had hoped for, investor sentiment should be boosted by the issuance of USD 140 billion in bonds to finance growth and by the authorities’ targeted market interventions, which include direct purchases of ETFs. On top of that, a whole series of measures was announced last Friday aimed at easing mortgage lending conditions, reducing mortgage deposit requirements and enabling local governments to buy property directly. These are the most extensive measures introduced so far to shore up this debt-ridden sector.
These factors combined explain why some investors have increased their exposure to the country, with funds flowing out of Japan and India as a result. The move seems to be tactical for now, as there are still many bumps on China’s road to economic recovery, given the troubles in the property sector and the future trade tensions with the US. But after such a long period of underperformance, the market has plenty of upside, especially since many investors have still not shaken off the bearish sentiment of the past three years.
Precious metals hit new all-time highs
After consolidating for just one month, gold is once again on the rise, hitting a new all-time high at the start of this week. Silver has also ended a long bout of underperformance. Falling interest rates have, of course, helped to drive up these metals, but that’s only a small part of the story. Inflows into ETFs are still negative, so we need to look further east to find out what’s really going on.
Since Russia invaded Ukraine, China has been scaling back its US dollar reserves and instead has been piling up assets that the US can’t confiscate. Gold imports into China have increased as a result, reaching their highest levels since 2015. China’s central bank has been involved in these purchases, and gold now makes up 5% of its reserves. But private investors have also been in on the game – inflows into gold funds have picked up and bullion purchases are also on the rise. In the short term, Chinese investors’ renewed interest in their domestic market could rein in gold’s rise, but we still think it offers plenty of upside in the medium term.
This week’s figure : 2
The US inflation figure was stable in April, which has rekindled hopes that the Fed might loosen its monetary policy this year. Investors now expect there to be two 25 bps cuts before the end of 2024, which could push up stock markets.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
