Trade war – A gentle breeze compared to Covid-19
After two months of lockdown, China now has limited numbers of new coronavirus infections. Japan and South Korea are well on track, and Taiwan, Hong Kong and Singapore are not reporting any new cases.
All these countries have one thing in common, they were prepared and had an epidemic action plan. Experience from previous diseases like avian influenza, SARS, swine flu and, in Korea’s case, MERS, meant that the spread was controlled relatively quickly.
This is positive and means that economic activity in China is well on its way back to normal. Factories and restaurants are opening up and domestic travel is allowed. Nevertheless, Asia’s stock markets fell broadly this month. China and Hong Kong performed best with a decline of 4–5%, while India and Indonesia fell the most with drops of 22%. In fact, Chinese equities have been almost defensive in this environment.
Developments in the US stand in sharp contrast to the situation in Asia. The countries of northern Asia are largely driven by exports. With an expected fall in exports from China to the US of some 30–40%, many small and medium-sized companies will suffer greatly. It is no use getting labour back into production if customers in the US and Europe fail to place orders, cancel existing commitments and ask for payment deferrals. The trade war feels like a gentle breeze compared to Covid-19.
Domestic consumption, digital business models and industries that can be stimulated domestically, like real estate, will do better in this situation. The fund has large holdings in Tencent, JD.com and Hong Kong Telecom Trust. Companies with net cash and high dividend yields are also safer holdings. The fund’s large holdings in Taiwan Semiconductor Manufacturing (TSMC) also feel safe even though semiconductors are cyclical. The company is a market leader at the forefront of technological development, has net cash and pays a dividend of 4.5%. Semiconductors will still be needed after the epidemic. In fact, we are already seeing increased demand for laptops since homeworking is now a necessity for more and more people.