Outside Looking In

Brian Spence*

The threat of a trade war between the US and China has created considerable volatility in Asian markets in recent weeks. Investors fear that it poses a continued threat to the growth of Vietnamese companies and, potentially, to Vietnamese economic growth. These concerns are valid, but to my mind, demand greater scrutiny.

An important point to note is that this volatility may feel uncomfortable, but it is not unusual. It comes after a sustained benign period in markets and volatility levels have only moved back to where they were in mid-2016 and remain at around half of their five year peak. While periods of low volatility are enjoyable while they last, the volatility we’re seeing today is a more normal pattern for stock markets.

However, that doesn’t mean that we shouldn’t examine the underlying causes of that volatility. In this, we can place the blame squarely at the mounting trade war between the US and China. Trade wars seldom end well and can be inflationary for the countries involved. There are understandable fears that the dispute will knock China’s economic growth off course, at a time when it already has some vulnerability because of its high debt levels and economic transition. In this respect, until the situation is resolved, the volatility may be justified.

We therefore need to decide whether these trade tensions could have longer-term repercussions for growth in the region. In this, a key consideration is where the new tariffs are focused. For the time being, they have been relatively narrow, focused on steel and aluminium on one side, and whisky and soybeans on the other. If it ends here – and there are no guarantees – the threats may be contained

At the same time, the US is not necessarily the most important market any more. Intra-Asian trade is growing and developing. New markets within Asia, for example Việt Nam, are emerging as countries move up the economic development scale. They too have need for infrastructure and provide fertile new markets to replace that of the US. China, perhaps realising this, has been relatively moderate in its response to date.

The question is: what happens next? This apparent victory for Donald Trump may be enough for him to declare a triumph to the US electorate and back away before it provokes domestic inflation, or it may galvanise him into bolder plans. The fear is that this trade war will spread, moving into more structurally important sectors. After all, Asia has started to become a greater threat to the US on technical innovation. This is arguably a far greater long-term risk for the US than a few steel imports. Certainly if the trade war escalated, we would become more concerned.

On a broad level, much of Asia has strong demographics, with a large population and rising income levels. Consumption is strong and there is an emerging middle class in the region. This supports stable growth for many companies.

The result of the recent volatility is that good has been thrown out with bad. The domestic growth of many Vietnamese companies has become cheaper to buy into from an investor perspective, while their fundamental characteristics have remained unchanged.

It is not certain that the volatility will dissipate until the finer points of trade negotiations have been settled. But for those worried about the recent volatility in the stock market, I would suggest that you use this as an opportunity to invest further. 

* Brian Spence is Managing Partner of S&P Investments. He has over 35 years of experience in the UK financial services industry as an investment manager, financial planner and M&A specialist. He is a regular contributor in the UK financial press and has a deep understanding of the financial services community. Brian’s column will reflect on all the challenges and opportunities within the Vietnamese market, bringing a fresh perspective to today’s hottest issues. The columnist’s email address is brian@sandpinvestments.com.