Despite Donald Trump and Xi Jinping’s G20 handshake, trade woes will remain a drag on markets, especially in Asia

Slowing global growth will negatively impact trade, while Sino-US talks have had too many twists and turns for investors to become complacent, despite the good optics coming out of Osaka

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The latest pleasantries between Xi Jinping and Donald Trump in Osaka shouldn’t lead investors to think trade is no longer a problem for their portfolios. Photo: Reuters

Published: 3:00am, 6 Jul 2019Updated: 4:33am, 6 Jul 2019

Trade concerns will continue to plague markets for the rest of 2019 and well beyond. This is not only the result of the US government’s shift towards more protectionist policies, but also due to the effects of slowing global growth on international trade.

Setting aside the US-China trade dynamic – but only momentarily, as this situation is one of the most important considerations when making asset allocation decisions this year – markets care about trade because of what it signals for business activity.

Slower growth in international trade is typically a negative signal for equity markets, particularly in externally exposed economies like those in East Asia. Modest growth means less demand for imports, resulting in fewer exports from the Asian manufacturing powerhouses like South Korea and Taiwan.

Collectively, these issues imply that equity markets, broadly, will see lower profit growth in 2019. This is particularly true for Asian emerging markets, where exports and profits are highly correlated and, to the extent profits contribute to returns, lower trade means lower returns.

Indeed, amid this environment of trade tensions, earnings per share estimates for the full year have declined, dragging markets lower with them.

Other ongoing trade disputes, like between the US and Europe, add another layer of uncertainty, and may make trade more expensive if additional tariffs are applied. Paying attention to the US-China relationship at the expense of these other simmering tensions may mean ignoring a source of additional volatility later in the year.