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Trade War: F&C’s Niven confident US and China will step back from brink

10 May 2019

Paul Niven, fund manager of F&C Investment Trust, is hopeful the latest escalation in US tariffs on Chinese exports by president Donald Trump will not lead to a breakdown in talks between the two superpowers.

F&C (FCIT ) fund manager Paul Niven maintains his belief that the US and China will agree a trade deal, despite threats from president Donald Trump reigniting tensions this week.

Niven, who runs the £3.7 billion global portfolio, which is UK’s oldest investment trust, said he believed the two countries would reach a resolution.

The manager made his comments yesterday afternoon hours before the US pressed on with hikes in tariffs from 10% to 25% on $200 billion worth of Chinese exports. This followed a barrage of tweets in the past week from Trump who has been angered by what he sees as China’s attempt to renegotiate prior trade commitments.

Global markets have been hit by the escalating tensions, with the EuroStoxx 50, the Dax – the German market which is particularly reliant on trade with China – the S&P 500 and the FTSE 100 tumbling this week.  

Overnight the US stock market retreated further with investors fearful of retaliation from China, which said it ‘deeply regretted’ the move and repeated its threat to take ‘necessary countermeasures’.

The pessimism was tempered by some optimism after Trump revealed he had received a ‘beautiful’ letter from president Xi of China who had urged the two countries to resolve their dispute. In Asia markets rose overnight in response.

Niven said: ‘Now it’s clearly encouraging that trade negotiators from China are in Washington today and tomorrow and it remains our base case that the threat to impose additional tariffs will not be followed through.’

He argued it would be counterproductive to US interests for Trump to escalate the trade war as it would result in China not increasing planned purchases of American products. Trump would also want his ‘America First’ battle with China to appear to have been successful in the run-up to the 2020 US presidential election, and increasing tariffs would not enable him to demonstrate this outcome, Niven explained.

The manager added this would also be detrimental to the US stock market which is a key barometer for Trump, as the US president has made clear.

‘So we believe there will be some respite from these renewed trade concerns over the next month or so, perhaps in shorter order but I do suspect that tensions will ebb and flow over the remainder of the year and into next as the focus moves from agreement on the terms of a trade deal to compliance with the terms,’ he said.

However, if talks did break down, Niven warned equitie markets would be in for further losses, with technology companies and those stocks exposed to global supply chains among the most vulnerable. In a more extreme case, he cautioned that a possible decline in the Chinese currency could weigh on other emerging market currencies, ‘creating a deflationary impulse which other regions particular Europe and Japan would struggle to manage’.

And while this made for a benign base case for trade, Trump’s tweets served as a reminder of the ‘messy’ nature of the negotiations and that even with a resolution, enforcing and monitoring the deal would still be hard.

‘Risks have risen but we don’t think that there will be a pernicious outcome,’ he added. ‘As similar outcome is also likely from the recent US and European confrontation though as might be expected there might be some more bluster from the US before a deal is actually struck.’

Yet even with the likelihood the US and China would strike a deal, Niven said investors had perhaps been premature with optimism about the progress of the talks, pointing out it had been one of the driving factors behind the rebound in markets since the beginning of the year. 

‘And even after the recent setback, it is still up by over 15% year-to-date,’ he said.

Niven’s portfolio, which holds 53% in North American shares, had just managed to keep up with the market momentum. A net asset value total return of 9% underpinned a 10% rise in the share price, matching the gain in the FTSE All-World index.

In March, F&C issued £150 million of shares, its first issue in six decades. This was enabled by the wider recognition the trust attracted upon celebrating its 150th birthday, helping shrink the discount to 0.6% but this has since widened again slightly to 2.5%.

Last week, F&C named non-executive director Beatrice Holland as the successor to Simon Fraser as chair of the trust, with the former fund manager and chief investment officer stepping down after nine years at the helm of the trust.

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