Exposure rates of the Dorval Asset Management Range – 20th May 2019

After the sudden hike in US border tariffs on Chinese imports at the start of the month, investors are now caught up in the cross-fire of the trade war again. China is retaliating gradually but surely, firstly by slightly upping duties on some US imports ($60bn), then by the drop in the yuan that is set to follow.

This dip in the currency also involves a fresh phase of underperformance for the emerging markets (cf. chart 1).

Yuan/US$ and relative performance for emerging markets

MSCI emerging vs. MSCI world (RHS)
Yuan vs. US$ (inverted scale, LHS)


There are obviously no winners in this devastating game, but yet the world economy may not be weakening that severely nonetheless. China is admittedly harder hit in the short term than the US, with the impact on GDP of potentially as much as 1%, but the country will definitely be able to broadly absorb this shock via fresh monetary and fiscal stimulus moves. Meanwhile, the effects in the US are much smaller and are offset by falling long-term rates, which prop up the real estate market (cf. chart 2).


Low interest rates and the end of fiscal austerity shore up construction in developed markets

NAHB housing market index in the US
Building sector climate in the euro area

These counterweights, which we are also witnessing in Europe via more accommodative monetary and fiscal policies, mean that investors do not have to completely lay to rest the prospect of a continued moderately robust world economy, even if they are becoming more wary on the most cyclical stocks. It now remains to be seen just how aggressive the fresh US offensive will be, and Donald Trump has every reason to curb the risks for the US economy for political reasons, while also keeping hefty pressure on China. The key question now will be whether threats of an extension of US border tariffs to all Chinese imports actually materialise, although this move is unlikely before the planned meeting between Donald Trump and Xi Jinping at the end of June. There is also Donald Trump’s crusade on the automotive sector, where the threat of a 25% US border tax on European and Japanese automotive imports has been pushed back six months.

In light of these factors, we are maintaining moderate exposure to the equity markets and reducing our most cyclical plays for now i.e. emerging markets and small-caps.


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