KUCHING: Malaysia may be caught in the crossfires of possible global trade wars in light of US President Donald Trump’s announcement that he will impose tariffs on up to US$60 billion worth of Chinese goods and impose investment restrictions on Beijing.
According to Reuters, Trump repeated on Thursday that he wants a US$100 billion reduction in China’s trade surplus, while his top trade negotiator, Robert Lighthizer, said fundamental changes that allow US companies to keep their technological edge over Chinese competitors were critical to the future of the US economy.
Although the full list of items is not published yet, Affin Hwang Investment Bank Bhd (AffinHwang Capital) believed that information and communication technology (ICT) would likely be of concern.
“Asia has extensive technology supply chains and is also a large export market for Asia,” the research firm said.
However, while some argued that the regional supply chain has weakened over the years through geographic diversification by Asian exports as well as import substitution by China, the research firm believed the effect on Asia from trade tariffs would still be significant.
“The Malaysian economy will not be spared totally from the possible full blown global trade wars, if it happened, as the country is dependent on external demand.”
AffinHwang Capital believed the growth momentum of the global economy will be affected, attributed partly to the negative impact of some disruptions to the global trade.
Similarly, the research firm also believed no emerging market could escape fully over the global slowdown and financial market volatility and global sentiment towards risk.
“China is Malaysia’s largest trading partner, accounting for around 12 per cent of the country’s total exports, and while US contributes close to nine per cent,” it said.
“The rebalancing between these two superpowers (imposition of tariffs by US and China) will likely slow down Asean’s intra-regional trade performance.”
In a separate note, AmInvestment Bank Bhd (AmInvestment Bank) believed Malaysian market would likely be caught in the jitters given that exports play a crucial role in driving the GDP and concerns on companies involved in the global supply chain production of the Chinese exports.
If the trade war continues extensively, it said there might be some knock-on effects on global gross domestic product (GDP), though the research firm may not want to overstate these at this stage.
“Apart from the US and China, we also need to observe Japan, Mexico and Canada as they are the key trading partners of the world’s largest economies, focusing on trade policies specifically in areas of automobiles and auto parts, electronics, petroleum products, and electronics and machinery,” the research firm affirmed.
AmInvestment Bank noted that the tariffs slapped by the US on China, and with China retaliating, have caused jitters on global share prices.
“Apart from addressing the US$375 billion trade deficit with China, the move has also incentivised President Trump to deliver his campaign pledges with the tariffs acting as a bargaining strategy for key voting states in the US mid-term election in November,” it said.
AmInvestment Bank predicted equities facing the biggest hit as corporate earnings, especially from the cyclical sectors most exposed to economic swings, would likely face strong selling pressure.
“Companies which account for a large portion of global production chain of Chinese exports, namely the US, South Korea, and Taiwan will be affected.
“Japan’s equity market will remain jittery due to the strong importance of exports in driving GDP and also a stronger yen, which is deemed as a safe haven currency, will make its exports more expensive.
“Selling pressure remains on China and Hong Kong markets.”
European and South Korean markets would be less impacted, it added, since they were included in the exemption list alongside Argentina, Australia and Brazil but they might still be less attractive as investors seek a safe haven.
“We feel that investors who seek to cushion their portfolios against the risk of a full-scale trade war should ensure that they are not overexposed to export-oriented equity regions or sectors that are highly dependent on global supply chains as these will be hit by a combination of rising input costs due to tariffs, and possibly also supply restrictions.”
AmInvestment Bank called on investors to have adequate global diversification, including assets in the US where some sectors could benefit directly from the tariffs such as steel manufacturers.
“They should consider equity put options to reduce portfolio volatility. Put options are financial instruments that give traders an option to sell assets at an agreed price on a particular date, thus allowing traders to hedge their portfolios.”