US-China trade war agreement could extend economic cycle, fund manager says
- Trade agreement would ease market fears, according to Eoin Walsh of TwentyFour Asset Management
- Investors should focus on short-dated credit to lock in returns
A resolution to the ongoing trade war between the United States and China would potentially extend the economic cycle, but investors should prepare for a potential downturn, according to TwentyFour Asset Management, a fixed-income investing specialist in London.
Eoin Walsh, a founding partner of TwentyFour Asset Management, said there is not enough weak economic data to suggest a potential recession is on the horizon.
That said, investors should look at short-dated credit products to lock in their returns, Walsh said.
Given the potential price volatility in the market this year, longer dated products, such as four-year or five-year bonds, are not guaranteed to produce positive returns, he said.
“Much more positive talks taking place between the US and China. It does appear they will reach some sort of agreement,” Walsh said at a media briefing in Hong Kong. “That would remove a lot of fears that we had in the market last year, certainly the fears of a global economic slowdown. A lot of those would be rectified by having an agreement between the US and China.”
US President Donald Trump has placed tariffs on nearly half of all goods imported from China in a dispute over what he characterises as unfair trade practises by China and a widening trade deficit between the world’s two largest economies.
The US is set to increase tariffs from 10 per cent to 25 per cent on some US$200 billion of Chinese goods in March if the two sides cannot reach an agreement. Chinese Vice-Premier Liu He has accepted an invitation to travel to Washington later this month in hopes of reaching a pact.
TwentyFour Asset Management operates as an independent subsidiary of Vontobel Asset Management, after Vontobel acquired a 60 per cent stake in 2015. TwentyFour Asset Management has about US$18 billion in assets under management.
Walsh said the US Federal Reserve is likely pause its tightening cycle this year and any further rises by the Fed could be at the end of 2019, “which obviously would be very supportive for the markets”.
“There’s one thing to look out for in 2019 is what the commercial banks are doing. Are they picking up the baton of tightening up financial conditions from the Federal Reserve?,” Walsh said. “So far, it appear they’re not. However, if commercial banks pull back on lending to weaker parts of the economy, then we know that actually a recession is on the horizon. At the moment, we don’t have enough data to determine that.”
The strength of the US dollar in 2018 is not likely to continue this year, Walsh said.
“That by itself is a much more positive factor for emerging markets,” he said.
Emerging market economies often take out loans or issue bonds in US dollars, so a strong dollar can dramatically impact their borrowing costs.
