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Trade war: doubts persist despite latest round of goodwill

Lex Hall  |  12 Sep 2019Text size  Decrease  Increase  |  
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Fears remain among analysts and asset managers that trade war tensions will worsen and hurt global growth, despite the latest softening in the dispute.

Morningstar analyst Dave Meats argues the US posturing on trade has hurt global economic growth and raises the potential for a global wave of protectionism. 

Ron Temple, head of US equity for Lazard Asset Management, also fears the investing community is underestimating “the severity and the duration” of the trade war, which he predicts could extend beyond the Trump administration.

Temple says the trade war has evolved to the point where China is now considered - on both sides of US politics - as a security threat. 

“I think it's evolved from an economic dispute around trade deficits, intellectual property, market access, industrial policy, which you can negotiate, to increasingly be viewed in Washington DC on a bipartisan basis as a national security issue,” Temple said in a recent interview with Morningstar.

“And put simply, I think, in the US people used to think of China as an economic competitor, but increasingly people are thinking of it as a national security adversary.

“I tend to think of ebbs and flows with a structurally more negative trajectory for this relationship. And I think it will last well beyond Trump administration.”

Image showing A2 Milk's future cash-flows

'People are thinking of China as a national security adversary': Lazard Asset Management's Ron Temple

Markets rose overnight following China’s announcement that it will exempt several US products from tariffs. This coincided with the Trump administration’s decision to delay tariffs as a goodwill gesture to mark the 70th anniversary of the founding of the people’s republic. 

The US announced overnight that it has agreed to delay increasing tariffs on $US250 billion ($364 billion) worth of Chinese imports by two weeks "as a gesture of good will".

US President Donald Trump said on Wednesday the postponement came "at the request of the Vice Premier of China, Liu He, and due to the fact that the People's Republic of China will be celebrating their 70th Anniversary".

The tariffs were set to increase on the goods from October 1 to 30 per cent from 25 per cent, but they will now take effect on 15 October.

Chinese trade deputies are expected to meet with their US counterparts in mid-September in Washington before minister-level meetings in early October in the US capital.

The talks will involve Chinese Vice Premier Liu He, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.

The delay could enable talks to take place before the tariffs kick in.

The world's two largest economies imposed fresh tariffs on each other on 3 September, ratcheting up a tit-for-tat tariff war that has unsettled financial markets and raised the spectre of a global recession.

Markets around the world rose on the news. Wall Street moved higher, led by tariff-sensitive technology and industrial stocks, after China extended an olive branch ahead of next month's trade negotiations with the US.

China announced tariff exemptions for a basket of US goods, a move viewed by many investors as a show of good faith just weeks ahead of planned talks aimed at resolving the trade war, which has bruised world economies and rattled markets for months.

The latest development aligns with Meats’ thinking. He says a benign outcome is possible if the US and China can find a face-saving solution that allows them to declare small wins. 

'Protectionist impulses'

Meats says that while the US-China trade war only accounts for a small slice of global trade, the US’s “protectionist impulses” are causing other countries to take similar action. The US has flagged tariffs on French wine and German and Japanese auto parts, while American tech companies are the target of European Union governments.

Elsewhere, disputes have flared between third-party countries such as Japan and South Korea, which poses a further threat to global supply chains and trade volumes, says Meats. 

“There is potential globe for a global wave of protectionism, which could do a lot more damage than a bilateral trade dispute," he says.

“In that scenario, global GDP growth could dip 1 to 2 per cent below the long-term average, according to various academic estimates, supported by our own back-of-the-envelope math".

In July, the International Monetary Fund revised its latest forecast on global economic growth for the year downwards to 3.2 per cent, 0.1 per cent lower than it had predicted in April, due to the ripples generated by the trade war.

Meats says such a scenario could also crimp demand growth for crude oil, which could fall below 500 thousand barrels per day - much less than current estimates for 2019 and 2020.

The US Energy Information Administration said in its Short-Term Energy Outlook on Tuesday that 2019 oil demand growth will come in at about 900,000 barrels a day, down sharply from the 1.55 million it was anticipating back in January.

On the upside, this could present opportunities among producers that are better equipped to cope with lower prices. Meats cites among his top picks: Diamondback Energy, EOG Resources and Pioneer Natural Resources

Diamondback Energy is an independent oil and gas producer in the US. The company operates exclusively in the Permian Basin. At the end of 2018, the company reported net proven reserves of 992 million barrels of oil equivalent. Net production averaged about 283,000 barrels per day in 2018, at a ratio of 76 per cent oil, 13 per cent natural gas liquids, and 11 per cent natural gas. It is trading at a 23 per cent discount to fair value.

EOG Resources is an oil and gas producer with acreage in several U.S. shale plays, including the Permian Basin, the Eagle Ford, and the Bakken. At the end of 2018, it reported net proved reserves of 2.9 billion barrels of oil equivalent. Net production averaged 719 thousand barrels of oil equivalent per day in 2018 at a ratio of 72 per cent oil and natural gas liquids and 28 per cent natural gas. It is trading at a 5 per cent discount to fair value.

Pioneer Natural Resources is an independent exploration and production company with operations throughout the southern and central US. Following planned divestitures, Pioneer will be exclusively focused on the Midland portion of the Permian Basin in Texas. At year-end 2018, Pioneer's proven reserves were 977 million barrels of oil equivalent, or boe, with net production of 320 mboe per day. Oil and natural gas liquids represented 80 per cent of production and 77 per cent of proven reserves. It is trading at 20 per cent discount to fair value.




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