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The trade war feels most like a game of call my bluff

Asian stock markets were weak in August. Carnegie Asia fell 3.0 percent. The news this month was dominated by five events, all negative.

Democracy demonstrations in Hong Kong escalated. The US-China trade war intensified, with new export tariffs on September 1. The global economic outlook is deteriorating, and more analysts now expect a recession. Global bond yields fell sharply as investors flocked to “safety”, resulting in an inverted yield curve − a clear indication of worse times ahead. Finally, data from China showed that economic growth is slowing.

On the upside, profit trends for many Chinese companies in the first half clearly beat expectations. Banks are having a somewhat tough time, but insurers’ profits surged 25-30 percent. Property developers are also showing strong sales and profit numbers. In consumption, sportswear is doing very well and profits for Anta Sport were up sharply. Alibaba and Momo both posted good reports.

The trade war feels most like a game of call my bluff, or possibly beggar-my-neighbour. Who will blink first? I would think that Xi Jinping has a better hand than Trump, but Trump wins on attitude, arrogance and ignorance. The new tariffs run the risk of damaging US companies harder and faster than they hurt China. China is significantly more long-term in its strategy, and more resilient.

It is interesting to follow the development of companies that benefit from the trade war. For example, Mediatek in Taiwan, which manufactures semiconductors for mobile phones, could replace US Qualcom when its exports to Huawei are blocked by Trump’s protectionism. China wants to become self-sufficient in technology to reduce its dependence on the US, but the US is still dependent on Chinese capital to finance its deficits (budget, trade and government).

Carnegie Asia decreased its holdings in Hong Kong’s Swire Pacific and India’s HDFC Corp this month. The investments in Reliance Industries were increased.

 

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