SINGAPORE (May 20): The tide appears to have shifted once again for global stock markets. After fanning hopes of an imminent breakthrough on a trade deal for months, US President Donald Trump escalated tensions with a trademark tweet a couple of weekends ago.
The US followed through by raising tariffs from 10% to 25% on some US$200 billion ($273.7 billion) worth of Chinese imports, which were postponed from March 1. It is also said to be preparing to levy taxes on the remaining US$300 billion-plus of goods that are currently exempted. China, in response, raised tariffs on US$60 billion worth of US imports.
The unexpected turn of events had investors scrambling, sending stock prices around the world broadly lower.
Higher tariffs will hurt both the US and Chinese economies, and the domino effect will reverberate throughout the global supply chain. Trump maintains that China will be paying the additional tariffs. In reality, the taxes will be shared by Chinese exporters, US businesses (importers) and US consumers. The proportion will differ depending on the products and relative bargaining and pricing power.
In the immediate term, however, investors are betting that Chinese manufacturers will bear the brunt of the trade war, in terms of reduced demand from trade diversion, which could also affect future investments in the country.
Chinese stocks were by far the outperformers in 1Q2019 — when hopes were high that a trade deal was imminent — but turned big losers in May. The selloff also dragged down regional markets while US stocks have held up better by comparison.
Trade negotiations are continuing but it is anyone’s guess when, or if, another truce or deal can be struck. Should the trade conflict persist or worsen, I suspect we could see another divergence in global stock markets — with the US outperforming the rest of the world. This would be a repeat of what happened in 3Q2018.
The US economy is on a stronger footing, even though China is stabilising. GDP grew a faster-than-expected 3.2% in 1Q2019. Unemployment is at 50-year lows and wage growth is gaining traction as the labour market tightens. And as mentioned previously, household debt has been on a downtrend since the financial crisis. All these will go some ways towards helping consumers adjust to the eventual price increases resulting from the tariff hike, which will take a few months to filter through.
US corporate earnings too have been more resilient than initially expected. 1Q2019 earnings for the Standard & Poor’s 500 companies (with 90% having reported) contracted just 0.5%, far lesser than the earlier projection of -4% before the results season began. Revenue was up 5.3% for the quarter, also higher than the previous estimate of 4.8%. Domestic-centric companies are reporting better earnings than those with global exposure, underscoring the relative economic weakness in the rest of the world.
Total returns for my Global Portfolio now stand at 5.6% since inception. The portfolio is outperforming the benchmark MSCI World Net Return Index, which is up 3.2%, over the same period.
The Global Portfolio has seen its fair share of volatility over the past year and a half. We have made mistakes and taken losses. At its worst, total portfolio value fell as much as 20.3% in the immediate aftermath of the 4Q2018 global selloff.
A string of good investments and improved sentiment for global markets in 1Q2019 have turned the portfolio around. Our decision to dispose of DIP Corp, China Sunsine, Sunpower and Nine Dragons Paper appear timely, as were our acquisition of Malayan Flour Mills (for which we have already locked in gains), Builders FirstSource, Disney and Ausnutria Dairy. I will write more about the outlook for stocks in the portfolio next week.
I acquired 40,000 shares in one of Malaysia’s largest banks, CIMB Group Holdings, and pared my holdings in Ausnutria Dairy by half, netting a gain of 61.5%. With these latest transactions, my Global Portfolio is now about 75.8% invested.
I am looking to invest the balance of the cash holdings possibly in the US market. As explained above, we believe US stocks would outperform in the near to medium term. Currently, the portfolio is about 54.8% invested in US stocks and 31.9% in China-based companies, at prevailing market values.
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
This story appears in The Edge Singapore (Issue 882, week of May 20) which is on sale now. Subscribe here
