UBS: Investors should prepare for ‘low returns’ in 2020 as US-China trade war uncertainty weighs on growth

Chad Bray

Investors should expect “low returns” next year as companies continue to navigate an uncertain environment created in part by the US-China trade war, according to UBS.

Companies are lowering their risks by cutting costs, delaying future investment, and containing inventory in response to the uncertain trade environment, Niall MacLeod, Asia-Pacific strategist at UBS’s investment bank, said.

Economic growth should pick up in the second half of 2020 after weakening further earlier in the year, MacLeod said, which should help drive a recovery in corporate earnings. Equity valuations, however, will be capped to the upside at a modest 7 per cent, he said.

“We see the bigger recovery in earnings occurring in 2021,” MacLeod said in a research report.

“US-China trade tariffs remain a key uncertainty though, that we believe will ultimately drive the speed and size of the earnings recovery.”

Trade war forces Asia’s companies to look homeward for growth

The world’s two biggest economies have been embroiled in a trade was for more than a year, with US President Donald Trump using hundred of billions of dollars of tariffs on Chinese goods to try to force Beijing to change decades of industrial and trade policies.

President Trump announced the countries had reached a “substantial phase-one deal” in October, but an agreement has yet to be signed. The Wall Street Journal reported on Thursday that China was balking at agreeing to specific levels of agricultural product purchases.

China has been pushing for the US to rescind tariffs as part of any deal, but Trump told reporters last week that he had not agreed to any rollback.

Larry Kudlow, a White House economic adviser, said on Thursday, however, that negotiations on the “phase-one” deal were approaching their final stages and the sides were speaking daily.

Despite the uncertainty, MacLeod said there are “plausible situations” where returns are better this year.

“Any combination of better growth (from an earlier cyclical upturn, or better trade outcome, or even idiosyncratic factors in tech) alongside persistently low yields creates scenarios in which equities could once again perform in double digit territory,” he said. “Likewise, given the run up in equities in recent weeks, a worsening trade outlook and or deterioration beyond our economics base case could take equities closer to recessionary levels – around 13 per cent lower than current levels. All these outcomes appear plausible to us – our confidence in our base case view is lower than normal.”

Goldman Sachs Asset Management said on Monday that investors should not expect a “smooth ride” in 2020 as geopolitical tensions, including the trade war, continue to make financial markets volatile. The global economy, however, should avoid a recession next year, the asset management unit said.

In a survey released earlier this week, 72 per cent of wealthy investors said they believed the investing environment was “more challenging” than five years ago, according to UBS Global Wealth Management. Of those surveyed, 66 per cent said markets today are more driven by geopolitics than fundamentals, with the US-China tensions attracting the most concern.

Asian investors were less concerned about the US-China trade tensions than other regions, but also were less optimistic about growth over the next decade, with only 65 per cent optimistic about long-term returns, according to the survey.

The UBS survey interviewed more than 3,400 individuals with a net worth of at least US$1 million in 13 markets, including the China, the US and the United Kingdom.

Credit conditions ‘bumpy’ as economy slows, trade war rages: S&P

Disappointing Chinese economic data released on Thursday “pointed to persistent downward pressures on growth in the near term”, according to Bank of America Merrill Lynch.

“Even with a ‘phase-one’ deal between the US and China, [gross domestic product] growth will likely continue to ease in coming quarters, given the lack of domestic policy easing,” Bank of America economists Xiaojia Zhi and Helen Qiao, said in a research note on Thursday. “There have been some minor adjustments recently … but we think they are far from sufficient to offset the growth headwinds, from external weakness and sluggish manufacturing investment demand, while the property sector seems set to soften.”

The Bank of America economists said they expect Beijing to enact a “comprehensive policy easing package” to stabilise growth.

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