Trump trade war: JPMorgan forecasts full fight against China

US
President Donald Trump and Chinese President Xi
Jinping
Oliver Contreras/Getty; Greg
Baker/Getty; Shayanne Gal/Business
Insider

• JPMorgan initiated a new base case for
  the trade war — tariffs on all trade flowing between China
  and the USA.
• “A full-blown trade war becomes our new base case
  scenario for 2019,” a note from analysts including Pedro
  Martins Junior and Rajiv Batra said.
• This, alongside domestic factors, could push Chinese
  stocks lower.

The Trump administration is likely to proceed with tariffs on all
China’s imports into the US by some point next year, according to
an analysis by JPMorgan published this week. If the prediction
comes true, it could spell trouble for Chinese stock markets.

“We now assume US-China trade war enters Phase III in 2019,
resulting in tariffs on all +$500bn of imports from China,” the
note, by analysts including Pedro Martins Junior and Rajiv Batra,
said.

So far, the Trump administration has placed
tariffs on $200 billion worth of Chinese goods,
affecting more
than 5,000 products. The president has made clear

he is willing to “Go to 500” — a colloquial term for placing
tariffs on all goods imported to the US from China.

That threat was previously seen as bluster, but people have
started to take it seriously after Trump escalated the dispute
with levies on a further $200 billion of Chinese goods. 

“The $200bn tariff on Chinese imports and retaliatory tariffs on
$60bn of US imports are in place,” JPMorgan wrote. “There is no
clear sign of mitigating confrontation between China and the US
in the near term.”

JPMorgan now has an all-out trade war as its “base case” —
meaning the bank believes it to be the most likely outcome.

As a result, JPMorgan downgraded its outlook for Chinese stocks
from overweight to neutral. The bank thinks the trade war will
have a negative impact on China’s economy and, as a result, hit
stocks.

“Total impact on China’s GDP growth is 1.0%, if China does not
take countermeasures,” the team wrote, continuing:

“The direct impact (-0.3%) is mainly via the hit on China’s
exports to the US (both price and volume effects), while China’s
imports would also decline as foreign content accounts for about
one-third of China’s gross exports (importing intermediary
products for the purpose of exporting). The indirect impact is
via consumption (-0.2%), investment (-0.5%) and sentiment
(-0.4%). Higher tariffs are squeezing Chinese manufacturing’s
profit margin, reducing the investment incentive and hiring,
which would then drag on consumption via reduced income.”

Assuming both the US and China place tariffs of 25% on all
imports, the hit to earnings of companies included on the MSCI
China index would be 2.6%, with growth slowing from 15% to 12.3%.

“China sectors such as energy, IT and industrials will be most
impacted based on our analysis, while sectors such as real
estate, insurance, diversified financials, telecom and utilities
generate virtually no revenue from the U.S,” the team wrote.

JPMorgan said that while the trade war is the biggest factor in
downgrading Chinese stocks from overweight to neutral, it is not
the sole reason.

The lender also listed a “higher equity risk premium due to risk
aversion and increasing government activism, further CNY [Chinese
yuan] depreciation, and uncertainty in China’s reform agenda,” as
possible drivers of negativity in the Chinese stock market.

JPMorgan is reducing its end of year target for the MSCI China in
2018 from 95 to 85, and reducing exposure to financials to
mitigate any risks.