Trading a trade war: ‘Markets don’t appear ready for that’

Some investors are shunning stocks with significant exposure to China.

  • By Steven Russolillo, Michael Wursthorn,
  • The Wall Street Journal
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How do you trade a trade fight? A previously abstract question is becoming more pressing for investors as U.S.-China trade relations fray.

“What we’ve learned the last few weeks is this is a genuine negotiation and both sides appear willing to escalate this,” said Michael Metcalfe, head of global macro strategy at State Street Global Markets. “It’s a credible threat and markets don’t appear ready for that.”

Here are ways investors are adapting.

Limit exposure to China

Some investors are shunning stocks with significant exposure to China, including in materials, technology and industrials. Among major tech stocks, Apple Inc. (AAPL) is down 7% in May, on pace for its worst month this year, while Google parent Alphabet Inc. (GOOG) has lost 3.7%.

“There are certain stocks I like longer term but I don’t need the headline risk associated with them,” said Robert Pavlik, senior portfolio manager at SlateStone Wealth, which has $700 million of assets under management. “I’ve broadened my radar to include avoiding any companies with direct exposure to China.” For example, Mr. Pavlik said he shelved plans to buy shares of smartphone chip maker Qualcomm Inc. (QCOM) after trade tensions flared. The stock is down 9.7% this month.

Sell Chinese stocks

International investors sold shares listed in Shanghai and Shenzhen through a trading link in Hong Kong at a record pace in the 20 trading days through May 17.

Through this trading link, foreigners had rarely sold mainland stocks on a net basis before.

Take flight to safety

UBS Group AG (UBS) added more U.S. Treasurys to model portfolios used by clients after President Trump’s initial threats to raise tariffs, and cut its exposure to emerging-market hard-currency bonds.

The shift “reduces some risk in the portfolio without giving up much upside if a trade agreement is reached,” said Mark Haefele, global chief investment officer of UBS’s wealth-management division.

If the additional tariffs already introduced start to damage global growth, UBS expects U.S. bond prices to rise further, pushing yields lower, while emerging-market bonds would sell off.

Short the yuan

Escalating trade tensions have hurt the yuan, reviving questions about China’s willingness to use its currency as a tool of trade policy.

Howe Chung Wan at Principal Global Investors said he has been shorting, or betting against, the yuan using derivatives since just before the trade squabble reignited.

“The market was not really expecting anything else but a deal, so to us this was the most efficient way to exploit that,” said Mr. Wan, a Singapore-based managing director who is Principal’s head of Asian fixed income. He said the yuan could potentially depreciate beyond 7 per dollar, which hasn’t happened since May 2008.

Sit tight

“We’re doing absolutely nothing,” said Steve Chiavarone, a portfolio manager of Federated Investors’ global allocation fund.

“None of the trade outcomes are predictable right now and our bullish view on the economy and markets is based on the Fed’s about-face,” he said, referring to the Federal Reserve’s decision to hold interest rates steady.

While trade tensions could shave 5% to 8% from the S&P 500 (.SPX), an eventual deal could yield significant upside, Mr. Chiavarone said. “You’d look foolish cutting early.”

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