Trump will want trade deal with China before 2020 elections, says DWS senior executive

US President Donald Trump will probably want to reach a deal with China in the trade war by next year in order to avoid hurting the American economy before the 2020 elections, according to a senior executive at DWS Group, Deutsche Bank’s asset management arm.

Trump’s threat to put 25 per cent tariffs on US$300 billion of Chinese-made products later this year could hurt the US economy by either forcing consumers to pay higher prices or squeezing corporate margins, said Sean Taylor, chief investment officer for Asia Pacific at DWS.

“The things that the people who didn’t vote for Trump would have been pleased with Trump have been the economy and the asset markets,” said Taylor.

“If more of the tariffs start to impact those two things, that’s not going to be great for him going into the election.”

Morgan Stanley said in a research note last week that the global economy could be in a recession within the next three quarters if the US puts tariffs on nearly all Chinese-made products and Beijing responds with its own countermeasures.

Other economists and analysts also have warned that the risk of recession is rising as the world’s two biggest economies tussle over trade, technology and years of industrial policy in China.
As an investor, DWS is being more cautious and is looking to preserve returns, Taylor said.

“What are we doing as investors? Look at the moment, we’ve had a good rally. We were preserving returns, so we’ve taken cash across our fixed income portfolios,” he said. “We’ve been more defensive in our equity portfolios. In our multi-asset portfolios, we’ve taken equities down to lock in gains.”

DWS had assets under management of 704 billion euros (HK$6.2 trillion) as of the end of March. The company’s Invest Asian Bonds fund, which invests in US-denominated Asian corporate bonds, recently reached US$1 billion in assets under management.

US President Donald Trump will probably want to reach a deal with China in the trade war by next year in order to avoid hurting the American economy before the 2020 elections, according to a senior executive at DWS Group, Deutsche Bank’s asset management arm.

Trump’s threat to put 25 per cent tariffs on US$300 billion of Chinese-made products later this year could hurt the US economy by either forcing consumers to pay higher prices or squeezing corporate margins, said Sean Taylor, chief investment officer for Asia Pacific at DWS.

“The things that the people who didn’t vote for Trump would have been pleased with Trump have been the economy and the asset markets,” said Taylor.

“If more of the tariffs start to impact those two things, that’s not going to be great for him going into the election.”

Morgan Stanley said in a research note last week that the global economy could be in a recession within the next three quarters if the US puts tariffs on nearly all Chinese-made products and Beijing responds with its own countermeasures.

Other economists and analysts also have warned that the risk of recession is rising as the world’s two biggest economies tussle over trade, technology and years of industrial policy in China.

As an investor, DWS is being more cautious and is looking to preserve returns, Taylor said.

“What are we doing as investors? Look at the moment, we’ve had a good rally. We were preserving returns, so we’ve taken cash across our fixed income portfolios,” he said. “We’ve been more defensive in our equity portfolios. In our multi-asset portfolios, we’ve taken equities down to lock in gains.”

DWS had assets under management of 704 billion euros (HK$6.2 trillion) as of the end of March. The company’s Invest Asian Bonds fund, which invests in US-denominated Asian corporate bonds, recently reached US$1 billion in assets under management.

If the trade war persists, investors in Asia should be focused on sources of domestic demand, Taylor said.

“India looks fantastic in that way. People are prepared to pay out for that quality because the earnings are probably going to hold up better” if trade tensions continue or escalate further.

Southeast Asia also is looking “pretty safe”, he said.

“The one thing that has hurt [emerging markets] over the last year or 18 months has been the rise of rates in the US and the dollar,” Taylor said.

If trade tensions continue, “you either have no rate hikes or you have potential cuts in terms of that. The main thing is you’re not going to have that pressure in the other emerging markets of having the dollar go up every day.”

However, if China allows the yuan to weaken in order to offset pressure on its economy because of trade tensions, that may hurt emerging market currencies based against the yuan, Taylor said.

US Treasury Secretary Steven Mnuchin accused China on Saturday of allowing the value of the yuan to slide in order to offset the cost of tariffs.

“If I was the [Federal Reserve], I wouldn’t cut rates until I saw the evidence that the things were slowing down,” he said. “Unless there is evidence that they over-tightened, I would be surprised if they acted that quickly and I’d also be surprised that they didn’t keep some ammunition ready for later to get through the uncertainty.”

Fed Chairman Jerome Powell said last week that the central bank was “closely monitoring” how trade tensions between the US and other countries, including Mexico and China, might affect the US economic outlook and would “act as appropriate to sustain the expansion”.

The Trump administration has since called off a plan to place tariffs on all goods from Mexico – first at 5 per cent and then escalating them up to 25 per cent – if the US’ southern neighbour did not take action to stop the flow of undocumented immigrants. The threatened tariffs against Mexico, announced last month, shook American businesses and financial markets.

“The longer term view is very positive for Asia in terms of different sources of domestic demand, valuations [are] cheap, sovereign ratings are improved,” Taylor said. “In Asian markets, people assume that the listed sector is incredibly indebted, but actually debt to equity in emerging markets is actually 41 per cent and it’s less than 30 [per cent] for MSCI Asia. That compares to 71 per cent in the US. It doesn’t mean one’s better and one’s worse. What it means for me is that Asia has deleveraged.”
Source: South China Morning Post