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Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined today by Fidelity's Catherine Yeung to talk about the latest Trump's trade tariffs.
Hello, Catherine.
Catherine Yeung: Hi, Emma.
Wall: So, we've heard today – it has been reported today that Trump is going to be imposing some trade tariffs on China. What did the report say?
Yeung: Well, nothing concrete at this point in time. So, in fact, year-to-date, we've had this sort of – a lot of headline news flow, but nothing tangible. And of course, for the rest of the year, we do expect to have this sort of to-ing and fro-ing pattern between the two nations.
Wall: And there have been some report to say that he is going to target the Made in China 2025 sectors. So, that's automation, it's robotics. If that is true, it does feel quite pointed?
Yeung: It does, because China is placing such an emphasis on those strategic sectors. And I kid you not, most management teams across China, across a number of sectors, not just biotech or tech, for example, have been talking to us for the past 18 months to two years about innovation and their innovation strategy. So, it does feel – I agree with you – very, very targeted of what the Chinese themselves are targeting.
Wall: And of course, this isn't the first conversation I have had with an individual from an asset management company about the trade war between China and the US. But at the beginning of the year, it was the rhetoric, from our side, was very much: no one will let it go this far. They are too important to one another. But incrementally, we seem to be moving towards an all-out trade war which could have quite devastating effects on the markets, couldn't it?
Yeung: It could. But at the end of the day, whilst investors shouldn't shrug off this risk, you would hope to see some kind of negotiation. And in fact, let's say, around Easter time the percentage or the actual – you have to say, put a probability on a full blown trade war was probably about 20%. It's probably still around that level. Maybe a little bit less because if we look at what Trump did in terms of North Korea and Kim and that sort of to-ing and fro-ing, you would hope we see another situation like this. But the really big risk isn't pretty obviously what the US stance has been year-to-date. But the risk is what the Chinese will do in terms of how they retaliate. And so, if they increase tariffs, that's going to increase or push up input costs for Chinese companies which then you could see them pass it on to the consumer or just basically eat into their profits and neither outcome is a good outcome.
Wall: And the US, this is not an individual stance on China. They have recently imposed tariffs on Canada or Mexico, talking about imposing tariffs on the EU. So, as you say, we are quite clear about what the US stance is, and it is protectionist. China, however, is not a minnow, is it? I mean, it is arguably as powerful as the US. So, should we be more watching not what Trump does, but actually what Xi does when it comes to the impact that's going to be felt for investors?
Yeung: Well, the risk is exactly that, what the Chinese will do? And again, if we look back at those original steel, aluminum tariffs that were announced, again, what was the true impact for Chinese companies? We look at percentage of total exports, Chinese steel, you're talking about 0.5% that gets shipped to the US, about one-and-a-half aluminum. So, again, it's not a material impact, but it's the association, the impact of sentiment or the market impact that we need to be mindful of.
Wall: Does it just mean that we should be prepared for a bit more volatility not just in Asia, in this region, but across the world, which of course, we haven't had in 2017 and preceding market cycle normalisation, and this will just have to get used to it?
Yeung: Well, exports, trade from a Chinese perspective, that's the wild card. Geopolitics, that's the black swan, especially for this year.
Wall: So, do you think we could see a correction this year? Or is it just much more about sort of knuckling down and being brave?
Yeung: It's about really looking for companies that have sustainable earnings. Because when you think about it – I mean, even that correction we did see earlier in the year, January-February, it wasn't too meaningful, was it? And so, you still get the sense that investors are a little bit complacent. Some people talk about the interest rate cycle being the key risk for the markets. But a lot of that is pricing unless, for example, one of the central banks really goes at a different pace than what the market is expecting. So, again, I would say that the geopolitical risk is really what's key. But again, because returns have been so, sort of, linear, nothing goes up in a straight line. So, we do expect to see some volatility. And it goes back to the point just about looking for companies with that sustainable earnings.
Wall: Catherine, thank you very much.
Yeung: Thanks, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
