U.S. – China Trade Tensions Set Stage for a Volatile Quarter

David J. Eiswert , Portfolio Manager

Key insights

  • Escalating political and trade tensions provided a volatile backdrop to Q2.
  • While we are entering a lower growth world, we anticipate that things are going to stop getting worse.
  • The U.S. – China trade dispute has made the latter more cognisant of the need to develop its own ecosystem.

Shift in Growth and Inflation Expectations

Uncertainty and volatility re-entered equity markets last quarter, as the political cycle in the U.S. started to engage and trade tensions escalated. We have long been of the view that we are heading back to a low-growth world, and that is now readily apparent as global fiscal stimulus continues to fade. We have had a clear shift in growth and inflation expectations this year, leading to an adjustment in monetary policy expectations with global central bank policies pivoting to a more dovish stance.

Things SHOULD Stop Getting Worse

We do not believe this is presaging a recession—we view it as just going from juiced growth to lower growth—and many of the secular trends, such as the shift to the cloud, the need for data centres, and the adoption of electric vehicles, should continue. We do not foresee a big cyclical economic acceleration, but think things are going to stop getting worse and that the trade rhetoric should continue to reflect progress on the path to a resolution.

Beneficiaries of Chinese Government’s Ongoing Stimulus Efforts

The rising trade tensions have served as a headwind for export-driven countries in the emerging world, and we remain carefully contrarian around our emerging markets exposure. Chinese equities are feeling the negative effects from the ongoing trade dispute to a larger degree than their U.S. counterparts, and the dispute has made China more cognisant of its need to develop its own ecosystem. We have used periods of weakness to add to our positions in several of the country’s leading technology platform companies and have also found several more idiosyncratic ideas in the region as well that should benefit from the Chinese government’s ongoing stimulus efforts.

European equities, meanwhile, are poised to benefit from the likely peaking of the U.S. dollar on a relative basis to the euro, with interest rate spreads moving from extreme to more normalised levels. We have been carefully contrarian on Brexit and think the region is attractive from a stock-specific perspective.

Intensifying Political Rhetoric and the Associated Increase in Volatility

Broadly, we think stocks appear reasonably valued given the current exceedingly low interest rate environment in a world that is going to grow slowly. As the U.S. election cycle nears, we expect the political rhetoric to intensify and plan to be opportunistic around the associated increase in volatility.


The following risks are materially relevant to the portfolio.
Country risk (China)- All investments in China are subject to risks similar to those for other emerging markets investments. In addition, investments that are purchased or held in connection with a QFII licenceor the Stock Connect programmay be subject to additional risks. Country risk (Russia and Ukraine)- In these countries, risks associated with custody, counterparties and market volatility are higher than in developed countries. Currency risk- Changes in currency exchange rates could reduce investment gains or increase investment losses. Emerging markets risk- Emerging markets are less established than developed markets and therefore involve higher risks. Small and mid-cap risk- Stocks of small and mid-size companies can be more volatile than stocks of larger companies. Style risk- Different investment styles typically go in and out of favour depending on market conditions and investor sentiment.

General Portfolio Risks

Capital risk
- The value of your investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the portfolio and the currency in which you subscribed, if different. Equity risk- In general, equities involve higher risks than bonds or money market instruments. Geographic concentration risk- To the extent that a portfolio invests a large portion of its assets in a particular geographic area, its performance will be more strongly affected by events within that area. Hedging risk- A portfolio's attempts to reduce or eliminate certain risks through hedging may not work as intended. Investment portfolio risk- Investing in portfolios involves certain risks an investor would not face if investing in markets directly. Management risk- The investment manager or its designees may at times find their obligations to a portfolio to be in conflict with their obligations to other investment portfolios they manage (although in such cases, all portfolios will be dealt with equitably). Operational risk- Operational failures could lead to disruptions of portfolio operations or financial losses.


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A high conviction global equity fund for which we seek to identify companies on the right side of change. The portfolio typically consists of typically 60-80 stocks representing our most compelling bottom-up growth ideas, often derived from technological innovation and secular disruption.
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