Trump’s trade war: UBS on how to profit in its ‘phoney war phase’

Reuters

• UBS says we’re in a “phoney war phase” of President
  Donald Trump’s trade war.
• Things could still go either way — tensions could
  escalate, or they could mellow out.
• To benefit from this uncertainty, UBS identifies
  several opportunities for investors.
• These opportunities are focused in the Asian
  region.

Wednesday’s summit between President Donald Trump and European
Commission head Jean-Claude Juncker gave investors, analysts, and
politicians
hope that the trade war may not escalate further, and could
even start to moderate going forward.

That, however, is by no means a certainty, and things could well
escalate once again given the noted
volatility of Trump’s personality.

Uncertainty may remain, but according to a group of strategists
at UBS, there’s money to be made until everything gets figured
out. The team — comprising of Niall MacLeod, Matthew Gilman, and
Jiamin Shen — argues that we’re in what can be called a “phoney
war phase” — where everyone is sizing each other up, but no real
action has been taken yet.

“In real economic terms, it seems that we are still in the
‘phoney war’ stage,” the UBS team wrote in a note to clients on
Wednesday.

“Global activity is holding up, exports are slowing for base
effect reasons, new export orders are softening, but not at
recessionary levels. Earnings are beginning to weaken.”

Investments in Asia during this period could be hugely lucrative,
the team said, adding that the market is stuck between “two
extremes.”

First up, there’s the possibility that tensions over trade ease.
In that scenario, MacLeod and his team say, there is “a lot of
upside for Asian equities (we see 18% upside in this scenario).”
If tensions re-escalate, however, there’s a big downside
possible. In the event that a full-scale trade war develops, the
downside could be as much as 23% for Asian equities, UBS said.

“With the market broadly between these two extremes and the
uncertainty over trade likely to linger for now, how can
investors make money in this environment without taking an
explicitly positive or negative view on trade?” 

The answer: “Hedge by identifying stocks/sectors that are already
pricing in either an extreme slowdown in growth or a much tighter
liquidity environment.”

Examples cited by the UBS team in Asia include the Indonesian
banking sector, and the Korean petrochemical sector. 

Indonesian banks, they said, are “already pricing in much tighter
liquidity if growth globally accelerates.” They are also pricing
policy tightening, UBS said, making them “likely beneficiaries of
easier liquidity in a trade war.” In a separate note, released
earlier in July, UBS put a “buy” rating on Bank Rakyat
Indonesia

In South Korea, petrochemical company valuations “suggest a
greater degree of fears around a trade war and could therefore
underperform less in such an outcome, but offer considerable
upside if growth is okay.” LG Chemicals is among the companies
UBS recommends looking at.

Another area to explore, MacLeod and team said, are renminbi
denominated Chinese stocks. Here’s the key extract from the note:

“We also think China A shares look interesting. Here, the
underperformance both against the region and H shares has been
stark this year, as domestic liquidity tightens alongside rising
trade fears. As Tao Wang has pointed out, it is highly likely
that liquidity will in some sense ease if trade worries increase.
This now appears to be happening.”