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China stock market

China stock investors need to be prepared for more pain from trade war

Disagreement between US and China escalates, fuelling fears the global economy could be dragged down

PUBLISHED : Tuesday, 18 September, 2018, 3:21pm
UPDATED : Tuesday, 18 September, 2018, 4:37pm

Chinese stocks are set for a turbulent end to 2018, after the US government’s decision to ratchet up its trade war with the country, by enforcing further tariffs on Chinese imports.

Hengsheng Asset Management predicts the Shanghai Composite Index (SCI) may drop a further 10 per cent in the worst-case scenario after the US proposed duties on another US$200 billion worth of products will take effect next week, likely prolonging declines on the world’s worst-performing equities market.

Other leading money managers at East Capital and HSBC Jintrust Fund Management also predict investor confidence to remain fragile, with unpredictable progress on the protracted trade war continuing to weigh on sentiment.

While the latest levies had been widely expected by investors, US President Donald Trump said in a Monday statement that the rate will more than double to 25 per cent in 2019 and extra tariffs on another US$267 billion worth of goods would kick in if there was any further retaliation by Beijing.

The US and China have already imposed additional tariffs on US$50 billion worth of each other’s goods. Trump has criticised China of “unfair” trading practices including the theft of US companies’ intellectual property. China has warned any escalation in the trade conflict is not in the interest of either country.

“Tensions are still brewing,” said Dai Ming, a fund manager at Hengsheng Asset in Shanghai. “Any decent market rebound is unlikely this year, judging by this latest development.”

The Hang Seng China Enterprises Index of Chinese companies trading in Hong Kong pared the gains to 0.9 per cent on Tuesday after China’s commerce ministry said in an afternoon statement that it will take counter measures against the new US tariff.

The SCI rebounded 1.8 per cent in a V-shaped bounce in the afternoon session as China Railway Construction and other infrastructure builders rallied on expectations that policymakers will boost investment to mitigate the impact of the escalating dispute.

How the trade war further develops and what additional measures both nations take hang like dark clouds over markets globally, making money movements tricky for investors.

“At any moment any significant public announcement can cause the markets to swing,” said Karine Hirn, Hong Kong-based partner with East Capital, which has US$4 billion in asset under management.

“So it is a challenging environment for short-term investors. Sentiment is definitely not positive.”

Hirn expects mainland Chinese stocks to flatline until November, and remains undecided on how they might then perform.

Hengsheng Asset’s Dai said the decline on equities has further room to run as the valuation is still way above its historical nadir. The SCI is valued at 12.7 times earnings, about a third more expensive than the all-time low for the multiple set in 2014, according to Bloomberg data. He has reduced Hengsheng’s exposure to stocks to 20 per cent of assets now, compared with 80 per cent at the start of the year.

HSBC Jintrust’s fund manager Shi Xingtao is equally cautious. “The market’s confidence recovery will take time and its process is unpredictable,” he said.

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