US vs. China: The potential winners of the trade dispute

US vs. China: The potential winners of the trade dispute

11 October 2019Reading time: 2 minutes

The trade dispute between the two great powers America and China could permanently alter the global market economy, leading to a shift in the balance of power. Some companies, particularly those operating in emerging markets, could benefit from an escalation in the trade war. We can show you an easy way to invsest in these equities.

The financial markets have been buffeted by the US – China trade dispute for a year or more now. A day seldom goes by without news coming out that moves the markets in one direction or another. But the trade dispute is only part of an underlying geopolitical shift of greater significance. For there is a struggle underway over who will emerge as the next digital superpower, defining a new world order.

The study, conducted by Vontobel in partnership with Eurasia Group, the prominent think tank, takes a look beneath the surface of the current trade dispute, at its roots, and analyzes the implications for the global economy. These trade tensions are a global problem, but certain countries, regions and sectors can benefit from the resulting power shifts. For at the end of the day, neither China nor the US will win, but rather countries like Brazil, Mexico, Malaysia, Vietnam, Thailand and Indonesia. What are the reasons for this?

Reorganized supply chains focused on shorter trade routes

Southeast Asia beckons with low labor costs, incentivizing the shifting of production chains. And the business climate has been steadily improving there as well.

Malaysia, Thailand and Indonesia with significant improvement

The countries that stand to gain the most from America’s punitive tariffs on Chinese goods, at least initially, include Vietnam, Indonesia, Thailand, Bangladesh, Taiwan, Malaysia and Mexico. Accordingly, foreign direct investment in Vietnam, Indonesia and Thailand has reached record levels since the trade tensions between China and the US first escalated. The economies of Latin America, on the other hand, are likely to be stimulated by growing US demand.

Investing in these potential winners

Vontobel has developed a tracker certificate focused on the countries and sectors likely to benefit from such shifts, creating a potentially profitable opportunity for investors: the Vontobel Trade Conflict Winners Emerging Markets Index, comprised of emerging market equities. The largest index weightings are initially in Mexico and Indonesia. Other countries poised to profit include Thailand, Taiwan, Brazil and Malaysia.

The index is comprised of 15 equities in 11 sectors from 10 different countries, and the index currency is the US dollar. The index components may be changed in accordance with the index policies, and adjustment is conducted semi-annually, at a minimum. The index universe is comprised of the stocks of emerging market companies which are ranked according to a point system involving more than 100 quantitative metrics. The stocks with the highest resulting score are seen as having the greatest potential for outperforming their peers, and thus are included in a sub-universe for selection according to qualitative criteria.

Good performance in recent months

We backtested the index to study its theoretical historical performance, i.e. to simulate how it would have performed in recent months. Backtesting does not yield any guarantee of future results, of course, and simulations cannot be used to reliably predict future performance. However, the practice does provide information of substantial indicative value. Our backtesting simulation showed that the index would have moved in line with the MXFE index until the end of 2018. The Vontobel Trade Conflict Winners Emerging Markets Index decoupled at that point as the trade conflict worsened, and started outperforming significantly.

 

The tracker certificate is issued in the currencies CHF, EUR and USD. The subscription period currently opened ends on October 25.

15/11/2019 09:44:26

 

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