UBS’ latest mid-year assessment report on Chinese equities has revealed that the MSCI China index and the CSI 300 index – which tracks the top 300 stocks on the Shanghai and Shenzhen stock exchanges – dropped by 7 per cent and 9 per cent, respectively after 15 June.
That date marks the day US President Donald Trump announced plans to impose 25 per cent of tariffs on $50 billion worth of Chinese goods, to which China responded by saying it would retaliate with equivalent tariffs of its own.
These tariffs officially came into effect on 6 July, with the AMP Capital chief economist noting that “things are likely to get worse before they get better”.
“The 15 June tariff announcement triggered broad-based market selloffs, suggesting investors are concerned about further escalation or the wider impact on the macro economy,” the report said.
“Prior to this, MSCI China had gained 5 per cent from the start of the year while CSI 300 was down 7 per cent, indicating more cautious sentiment among onshore investors. Investors have turned overall defensive this year.”
UBS strategists said in the report that they expected investment activity to be weaker, “but that a sharp slowdown in overall growth is unlikely”.
“Despite market fixation with China-US trade, we view escalation of trade tensions as a risk but it is not our base case.”
UBS’ growth estimates are 12 per cent for MSCI China and 8 per cent for CSI 300, with a preference for the consumer discretionary and consumer staples sectors, along with utilities and healthcare.
The still-brewing trade war with the US remains a risk as well as “over-tightening of credit conditions and persistent RMB depreciation”.
“In the risk scenario of an escalating trade war and currency depreciation/capital outflow, earnings growth may fall by 5-10 per cent and valuation would contract, leading to 15 per cent downside for CSI 300 and 25 per cent for MSCI China on our estimates.”
US announces new tariffs
On 10 July, US Trade Representative (USTR) Robert Lighthizer announced that the US will impose new trade tariffs on China for retaliating to its 25 per cent tariffs on $34 billion worth of Chinese goods.
“As a result of China’s retaliation and failure to change its practices, the President has ordered USTR to begin the process of imposing tariffs of 10 percent on an additional $200 billion of Chinese imports,” Mr Lighthizer said in the statement.
The proposed list for the new tariffs will be published “within the next few days,” according to the statement.
