BNP Paribas AM: Cautiously constructive on trade war risks

SUMMARY

Trade war risks are back in focus

• Investors are grappling with another wave of Sino-US trade war angst
  
• Markets have suffered from renewed volatility
  

De-globalisation is at the heart of the trade war

• We have long argued that there is more than trade to Sino-US tensions and de-globalisation is a medium to long-term theme
  
• We are not surprised to see a flare-up in tensions
  

‘Fragile goldilocks’: Is a slowdown becoming a bigger risk?

• While it is certainly a risk worth monitoring, our slowdown scenario probabilities already incorporate Sino-US tensions
  
• Given the goldilocks economic backdrop, recent tensions have provided us with attractive entry points to add market risk in developed market equities
  

Fundamentals make the difference

• Not all assets/economies are equal and fundamentals are making the difference
  
• EM/Chinese assets are underperforming as trade war risks pose a bigger challenge to economic prospects
  
• Developed market fundamentals (specifically domestic US) have remained solid
  

ASSET ALLOCATION

Buy the dip: long DM equities

• We used the recent correction to add market risk via US and EMU equities
  

Long carry assets

• We still see the goldilocks backdrop as conducive to carry assets and are long EM hard currency debt (high-carry, USD exposure)
  
• REITS are also on our radar to buy on dips
  

Building robust portfolios

• While we are cautiously constructive on the resolution of the US-China trade tensions, we also hold diversifying trades to protect portfolios
  
• Longs in 5-year US Treasuries vs 5-year German Bunds, USD vs Asia FX and RV CAC/DAX within European equities should help to diversify trade war risks