The Swiss bank notes that gold has been the "biggest winner" from recent worries about a US-China trade war.

Swiss private bank Lombard Odier is holding positions in gold, the Japanese yen, Swiss franc and areas such as hedge European property as a defensive investment play amid the increasingly volatile geopolitical landscape. 

In a note on the winners and losers of the US-China trade face-off, the Geneva-based private bank tracks the assets and markets that have won and lost as a result. 

After move and counter-move from the US and China, the firm said it puts risks of a trade negotiation breakdown at 40 per cent, up from 25 per cent previously. 

“Our model shows key growth indicators slowing since 2018, with the US economy holding up relatively well, Europe suffering, and China deteriorating considerably. US and European employment has weakened. Inflation generally remains subdued, but central banks globally have moved to cushion the impact of slowing trade,” Stéphane Monier, chief investment officer at Lombard Odier, said in a note. 

“Chinese growth has slowed from 6.8 per cent in the first quarter of 2018 to 6.2 per cent in Q2 2019, with fiscal, monetary and credit easing softening the blow. The shift of not just lower-level manufacturing, but tech and consumer goods companies from China to neighbours, including Thailand and Malaysia, has accelerated. We forecast Chinese growth will slow to 6.0 per cent,” he continued. 

“In the US, the impact has been more subdued, but a Chinese slowdown should eventually feed through into higher US inflation, and lower corporate profits and growth. Proposed new tariffs will be on consumer goods for which China has fewer competitors, making it harder for American buyers to switch. Tariffs are increasingly damaging US industrial, agricultural, energy and transport sectors, hitting Trump’s voter base hard. Farming leaders want a deal. Trucking and energy companies have registered double-digit falls in August alone. We see 2020 US growth slowing from 2.3 per cent this year to 1.8 per cent next,” Monier said.

“In Europe, export-oriented economies (Italy and Germany) have been hit hard by weaker demand. In Asia, economies like India, Indonesia and the Philippines have held up relatively well. Vietnam, Korea and Taiwan have benefited from export substitution to the US, and in some cases the gradual redirection of investment as global supply chains shift. But even here, higher US exports have to a large extent been offset by lower exports of input materials to China, leaving little net gain. All three economies slowed in Q1 2019.”

Monier noted that the largest “winner” of the trade war has been gold, which has risen 14 per cent since March 2018.

The protectionist moves have hit emerging market equities hardest: the MSCI EM index fell by 16 per cent from March 2018, led by China. 

“We favour keeping portfolios well balanced between cyclicals and defensive stocks, and have rolled over our portfolio hedges (put options on major equity indices) into November 2019,” Monier said. 

“In fixed income, a flight to safety has cut developed market government yields sharply since 2018, and yield curves have flattened. The US 10-year Treasury yield hit a multi-year low on 1 August, on the heels of the first Federal Reserve (Fed) rate cut since 2008. The German sovereign yield curve has fallen fully into negative territory, and the stock of negative-yielding government debt globally now stands at $15.6 trillion. EM credit spreads have widened in the past month, although hard currency EM corporate bonds – where we retain some overweight – have remained more resilient,” he said.

Monier concluded that “safe-haven” currencies such as the dollar, Swiss franc and yen have gained ground, but currencies more exposed to trade flows have depreciated. 

“Since March 2018, the yuan has depreciated by 10 per cent against the dollar, but only just over 1 per cent against the euro – somewhat belying claims of currency manipulation,” he added, referring to the Trump administration’s claim that China has deliberately weakened its currency.