• Trump ups the bet – announces additional tariffs to be slapped on China imports
  • China calls – increases tariffs on existing US goods
  • Investors fold – global equities tumbled as trade war fears escalate and investors turn risk-off
  • But trade contributes less than 6% of China’s GDP as it shifts focus to domestic consumption

 

Trump raises bet, China says GAME ON!

Sell in May and go away has never been more relevant as of late. Global financial markets took a hit after President Trump raised the stakes and announced more tariffs to be imposed on China imports, citing trade talks to be moving along too slowly for his liking.

China was quick to match Trump’s raise, and followed by retaliating with their own set of tariffs. US’ increase from 10% to 25% tariff on USD200 billion worth of goods would be countered with China’s move to raise tariffs on USD60 billion worth of US goods.

While the hike may not be taking place immediately, escalating tensions have already driven global markets into frenzy. In the 2-weeks ending 14 May, the S&P 500 lost 3.8% in local currency terms, while the Shanghai Composite tumbled 6.3% lower over the same period. The spike in uncertainty pushed investors to take a risk-off approach, leaving Gold prices the clear winner – gaining 1.3% while most equity markets were in the red.

 

Is China really at the losing end?

China is already on its transitioning path – shifting away from a manufacturing-centric economy to one that is driven by domestic consumption. The consumption sector has contributed more than 60% of the country’s GDP growth in 11 out of the last 16 quarter. Let’s look at some of the key statistics.

  • China is now the largest market for online retail
  • Represents 30% of the global market for luxury goods, automotive, consumer appliances, mobile phones, and spirits (the alcohol, not the other worldly beings)
  • More than half of China’s imports are taken from Asia – with less than 10% being from the US
  • US share of China’s exports was 19% in 2018
  • Trades make up less than 6% of the economy’s GDP contribution

 

China relies on China

By focusing on domestic consumption, China can rely on its army of more than 1.4 billion population. Now equipped with higher disposable income, the urban Chinese hold the potential to mould the shape of global consumption. We’ve seen a trend where these urbanites are focusing on transportation, communication, education, and health care. Hence the rise of the New China Economy.

The New China Economy focuses on consumption-centric sectors, putting e-commerce providers in the limelight. When it comes to the New China Economy, headlines grabbers are typically Alibaba Group Holdings, and Tencent Holdings.

 

The e-commerce giant is the 5th largest internet company in the world (by revenue). Its online platform allows goods from China retailers to be sold to more than 150 countries. Despite the pressures, Alibaba has remained resilient, and is expected to post a 48% jump in revenue when it reports its 4th quarter earnings later this week.

The stock slid 5.8% lower in local currency terms in the 2-weeks ending 14 May, but is still 27.6% up on a year-to-date basis.

As the 6th largest internet company in the world, Tencent Holdings is only slightly behind Alibaba Holdings. The company is heavily invested in its global expansion, having recently inked a deal with a Singapore game publisher to market its on-line games across the South East Asian region.

The stock slid 4.5% lower in local currency terms in the 2-weeks ending 14 May, but is still 18.0% up on a year-to-date basis.

 

How the ETFs have performed, and your options for market exposure

The commodity focused TradePlus Shariah Gold Tracker has done well in the last 2 weeks, supported by the uncertainty. The ETF has seen steady demand in the recent days given the lack of clarity from trade negotiations, and continues to play its role as a hedge against the weakening equity market.

The weaker performance of the domestic market has led to a drag in the performance of the Malaysian focused ETFs, with most ending the period in the red. Standing out with stronger performance is the broader based China focused ETF, and the US focused ETF – where both markets have enjoyed strong performance prior to the tensions. On the flip side, both markets have been equally impacted by the tensions over the past 2 weeks. While the New China Economy has been equally dragged down, we do anticipate the consumption-focused sectors to recover quicker once the dust has settled.

The domestic bond market, whereas, has been relatively quiet. Demand, which has been slow this year given the higher risk appetite of investors, only picked-up recently on the back of market uncertainties.

 

Index Bursa Code YTD Return The dreaded 1st 2 weeks of May Shariah Compliant Investment Focus
Commodities
TradePlus Shariah Gold Tracker 0828EA -0.57% 1.46% Yes Gold
Equities
FTSE Bursa Malaysia KLCI ETF 0820EA -2.79% -1.69%   Malaysia
MyETF Dow Jones Islamic Market Malaysia Titans 25 0821EA -9.73% -3.77% Yes Malaysia
MyETF MSCI Malaysia Islamic Dividend 0824EA -2.16% 1.34% Yes Malaysia – Dividends
TradePlus S&P New China Tracker 0829EA 4.07% -6.17%   China – New China Economy
CIMB FTSE China 50 0823EA 7.48% -5.39%   China – offshore listed China Companies
MYETF Dow Jones US Titans 50 (USD) 0827EA 9.95% -5.83% Yes US – 50 Largest Companies
MyETF Thomson Reuters Asia Pacific ex Japan Islamic Agribusiness 0826EA -5.88% -7.25% Yes Asia Pac (ex Japan) – Agri Sector
MyETF MSCI SEA Islamic Dividend 0825EA 0.74 -0.24% Yes South East Asia – Dividends
CIMB FTSE ASEAN 40 0822EA -1.55% 4.40%   ASEAN
Fixed Income
ABF Malaysia Bond Index Fund 0800EA -0.42% 0.08%   Malaysia

Source: Bloomberg as at 14 May 2019. All returns in local currency terms.

 


Disclaimer: This article has been prepared by Affin Hwang Asset Management Berhad (hereinafter referred to as “Affin Hwang AM”) specific for its use, a specific target audience, and for discussion purposes only. All information contained within this presentation belongs to Affin Hwang AM and may not be copied, distributed or otherwise disseminated in whole or in part without written consent of Affin Hwang AM. The information contained in this presentation may include, but is not limited to opinions, analysis, forecasts, projections and expectations (collectively referred to as “Opinions”). Such information has been obtained from various sources including those in the public domain, are merely expressions of belief. Although this presentation has been prepared on the basis of information and/or Opinions that are believed to be correct at the time the presentation was prepared, Affin Hwang AM makes no expressed or implied warranty as to the accuracy and completeness of any such information and/or Opinions. As with any forms of financial products, the financial product mentioned herein (if any) carries with it various risks. Although attempts have been made to disclose all possible risks involved, the financial product may still be subject to inherent risk that may arise beyond our reasonable contemplation. The financial product may be wholly unsuited for you, if you are adverse to the risk arising out of and/or in connection with the financial product. Affin Hwang AM is not acting as an advisor or agent to any person to whom this presentation is directed. Such persons must make their own independent assessments of the contents of this presentation, should not treat such content as advice relating to legal, accounting, taxation or investment matters and should consult their own advisers. Affin Hwang AM and its affiliates may act as a principal and agent in any transaction contemplated by this presentation, or any other transaction connected with any such transaction, and may as a result earn brokerage, commission or other income. Nothing in this presentation is intended to be, or should be construed as an offer to buy or sell, or invitation to subscribe for, any securities. Neither Affin Hwang AM nor any of its directors, employees or representatives are to have any liability (including liability to any person by reason of negligence or negligent misstatement) from any statement, opinion, information or matter (expressed or implied) arising out of, contained in or derived from or any omission from this presentation, except liability under statute that cannot be excluded.

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