As the interaction between Donald Trump and China surrounding tariffs is increasingly looking like a global game of table tennis, Ross Teverson, manager of the Jupiter Global Emerging Markets Fund, believes that while the trade war is now too big to ignore, there are still long-term structural growth opportunities in emerging markets
On a stock level, it is interesting to note that you can make an argument that the whole trade war began with the breach of conditions placed upon a Chinese telco equipment manufacturer: ZTE.
ZTE failed to fire four employees that were dealing with North Korea and Iran, which meant the company was subject to a blanket ban on operating in the US. Its shares were suspended and, when they were re-listed, fell 60%. So that highlights the unintended risks that can lurk in a portfolio and the need to keep aware of them.
The list of industries in Trump’s firing line for tariffs includes many things from furniture to trainers, but so far investors have focused on two in particular: autos and steel.
The Korean auto sector has not suffered any sanctions or tariffs yet, but investors are acting as though that will be the case, and therefore that Korean autos would lose some of their competitiveness in the US and China. So that sector has lost about 30% of its value recently.
The tech sector arguably should have been in the firing line given Trump’s focus on intellectual property theft and the existing barriers China puts up against firms such as Facebook, but has so far been mostly immune. But it is Trump’s policy to reduce the intellectual property leakage that has been weighing on sentiment.
On an index level, there has been a direct impact on the mainland Shanghai Composite Index, which has continued to fall and is down -16% YTD and -46% from its peak in 2015. This is despite decent earnings growth being delivered by most Chinese companies, some initial progress being made on deleveraging policies and the inclusion of domestic Chinese shares in the MSCI Emerging Market Index.
Additionally, exports were firm in June, up 11.3% year on year, though this was perhaps helped by frontloading ahead of tariff implementation. China’s trade surplus rose to US$41.6bn in June, the highest since December, the vast majority of which was accounted for by the US. June’s surplus with the US of US$29bn was the highest ever recorded.
Still, China can’t match the US like-for-like in trade sanctions. The US just recently added a 25% tax on a second wave of goods worth $16bn and China responded in kind – but this can’t continue to happen on a dollar-to-dollar basis. However, while China can’t match every trade sanction, it can make life uncomfortable for the US because it owns more than $1 trillion of US Treasuries (which it could sell making life very uncomfortable for financial markets).
What does this mean for the stocks we own?
In the near-term, trade-war concerns will likely continue to linger on sentiment. However, our portfolio exposure to those companies impacted by the tariffs or those being considered is extremely limited. We have no exposure to steel and low exposure to the auto OEMs. Most of our limited auto exposure is indirect through component suppliers to auto manufactures benefitting from structural growth in electric vehicles.
We believe our investing in a balanced portfolio of the most attractive bottom-up opportunities while ensuring diversified exposure across emerging markets should limit volatility to policy risk in any one geography. While shortterm political uncertainty may continue, the many opportunities for substantial positive structural change is no less attractive. Areas of long-term structural change where we have exposure include financial inclusion and travel and tourism.
In Kenya we own Kenya Commercial Bank, which is very well positioned to profit from rising mobile banking penetration through the MPesa payment platform.
Elsewhere, tourism is still an often-overlooked structural change which will likely deliver decades of growth. One stock we own which is exposed to this theme is Interglobe Aviation, India’s largest low-cost carrier is an example where the extent of this change fails to be reflected in the valuation.
While the political ping pong may weigh heavily on sentiment, we believe there are many attractive opportunities in the market which investors which we believe can provide sustainable, long-term returns.
Ross joined Jupiter in 2014 and is currently Head of Strategy, Emerging Markets. He manages the Jupiter Global Emerging Markets Fund and the Jupiter China Fund (Unit Trusts) as well as the Jupiter Global Emerging Markets Equity Unconstrained fund and the Jupiter China Select fund (SICAVs). He also manages, alongside Charles Sunnucks, the Jupiter Emerging & Frontier Income Trust PLC.
Prior to joining Jupiter, Ross worked for 15 years at Standard Life Investments, where he managed a global emerging markets equity fund. Ross spent 7 years in Standard Life Investment’s Hong Kong office, where he managed an Asian equity fund, and was a director of the business.
Ross is a graduate of Oxford University and is a CFA® charterholder.