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Money managers see emerging markets benefiting from trade war

Escalating trade threats between the U.S. and China, the world's two biggest economies, are creating opportunities to buy emerging market assets, according to some of the world's largest money managers.

After the Trump administration proposed tariffs on 1,300 Chinese goods, Beijing responded with a counterpunch: an additional 25% levy on about $50 billion of U.S. imports including soybeans, automobiles and aircraft. The decision rattled global markets, pushing emerging market stocks to the cheapest since December 2016. Equities trimmed losses later as representatives from China and the U.S. left the door open for a negotiated solution to avoid tariff proposals that wouldn't take effect for months.

Simon Smiles, chief investment officer for ultra-high-net-worth clients at UBS Wealth Management, said the potential market overreaction gives further reason for money managers to buy into weakness.

"We're all-in, in terms of the growth impulse, in terms of the relative valuations and that's against a backdrop of being constructive on risk assets more broadly," Mr. Smiles said on Bloomberg TV, adding that UBS is overweight emerging market equities and hard currency debt.

Gene Frieda, executive vice president and global strategist at Pacific Investment Management Co., said: "The market reaction is confused, reflecting the fact that it has no historical narrative on which to fall back. (The) Chinese actions were not surprising, but the market response shows how confidence has been diminishing."

"You cannot separate tweets against tech firms from tariff actions against China. This is a material change relative to the first quarter, when the market was bulletproof to bad news," Mr. Frieda added.

Anders Faergemann, senior fund manager at PineBridge Investments, said increased tensions might actually benefit emerging market assets as markets could dial down their optimistic view of global synchronized growth and ultimately global yields will come down. That would add to the return outlook for spread products such as emerging markets, Mr. Faergemann said.

"Valuations have already adjusted sufficiently to compensate for the increased equity volatility, and EM spreads are better value now. As long as China's retaliation to the U.S. provocation remains within reason ... fixed income should benefit and the appeal of EM remains strong and it stands to benefit from investors returning to a 2017 frame of mind," Mr. Faergemann said.

Kathy Jones, senior vice president and chief fixed-income strategist at Charles Schwab called the controversy a "mixed bag for EM. On the one hand, it could benefit agricultural producers like Brazil and Argentina, but I doubt that is enough to offset the concerns about slowing global growth and protectionism."

Sean Newman, a senior portfolio manager at Invesco (IVZ) Advisers, said although trade war fears should be taken seriously, it isn't a factor in his long-term outlook for emerging market assets.

"We like buying here but are conscious that trade tweets may present some downside risk," Mr. Newman said, noting President Donald Trump's tweets on Monday, where he "hated NAFTA in the morning and wanted a deal by the afternoon."

Greg Saichin, chief investment officer for emerging market fixed income at Allianz Global Investors, believes it's all just "a negotiating stance for the U.S. — somewhat justified, somewhat politically driven by the midterm elections in November. The Chinese understand this."

"Up to this point, Mexico was getting all the collateral damage given the negative NAFTA rhetoric. Now I'm not so sure. If this escalates into a full-blown trade war, then global growth will decrease with negative repercussions for oil and metals," Mr. Saichin said.

Frontier markets such as Angola, Ecuador, Ghana, Mozambique and Zambia, which rely on these commodities as a primary source of foreign-exchange generation, could be particularly hurt, Mr. Saichin added.