US-China clashes over technology and trade will keep global equities and select markets volatile for some time, firms say.

The US clampdown on China’s Huawei, coming hard on the heels of tariff hikes on the Asian country, will keep markets volatile for some time, Bank of Singapore and UBS warned this week.

BoS said that it is not yet willing to buy weaker equities.

Separately, another firm, Investec Asset Management, warned that global supply chains in the technology sector will be handicapped by US moves against Huawei, creating trade and economic issues down the line.

UBS argued that it is assessing the case for downside investment protection due to trade protectionism worries.

Washington DC accuses Huawei, which makes telecoms and other equipment, of building the capacity to spy on the West. As governments around the world push out 5-G “internet of things” systems, the use of Huawei technology has become a toxic political issue in countries such as the US, Canada and the UK. The US, for example, has frowned on the UK’s use of the company’s technology.

Bank of Singapore said a China-US accord over trade cannot be ruled out, but warned that the odds of a long-drawn economic conflict are increasing. 

Donald Trump's administration recently announced that it has put Huawei on a list of entities prevented from buying US parts and technologies without permission from Washington; and barred Huawei from supplying US markets. Although the US subsequently softened its stance and delayed the supply ban by 90 days for existing suppliers, the sale of components for new business remains restricted.

“Given that Huawei’s access to US chips is essential to its viability as a firm, this represents further escalation and the opening up of a new dimension of the US-China trade conflict. Not only has trust between the two sides been severely eroded, a genuine threat to Huawei’s survival would risk a sharp retaliation from China,” BoS said in a note. 

“With heightened trade uncertainty, we caution that the risk of talks breaking down is credible, and we see a one-in-three chance of this happening. Our base case, however, remains that both sides prefer to have a deal and will continue talks, and we will see an eventual trade agreement,” it continued. 

One question that we often hear is: If we did get a trade agreement, when would it happen?

Supply interrupted
Investec Asset Management warned that if the US-China row about Huawei escalates it could “damage tech companies not only in China but globally, including in the US”.

“Global supply chains could be reshaped as US and Chinese businesses seek to unwind their mutual dependence,” the asset management house said.

“The moves against Huawei should be seen in the context of an ongoing battle between the US and China for technological supremacy. Technology is at the heart of China’s ‘Made in China 2025’ industrial policy, which aims to spur the development of select high-tech industries for economic and national-security reasons,” it continued. 

As noted, other US actions against China include banning Huawei and ZTE from selling equipment to US telcom companies in 2012; blocking some China-linked entities from acquiring US tech companies and naming China as a violator of intellectual property laws.

Investec AM said that the US government’s moves are important because they will result in supply chain disruption. 

“Huawei consumes nearly 10 per cent of the world's semiconductor output and is a global leader in smartphones and telecommunications equipment. The company recently overtook Apple to become the world's second-largest smartphone manufacturer. It has revenues of over $100 billion and employs nearly 200,000 people,” it added. 

“The ability of US tech firms (for example Apple) to sell to China, a large and growing market for them, may be restricted. Chinese authorities are likely to retaliate, either by disrupting US firms’ ability to sell to China (eg, by withholding customs clearances or revoking operating licences) or by imposing bans on US products,” it said. “If the dispute escalates, supply chains are likely to be reshaped away from China.”

At UBS Wealth Management, the Swiss firm said: “Right now, tensions between the US and its major trading partners continue to drive stock market volatility. We believe that a shared desire to avoid slower growth will push the US and China towards an eventual compromise. However, we also continue to assess the need for further downside protection.”

“So while we continue to recommend that investors remain invested for long-term growth, we think they should consider protection strategies to prepare for near-term volatility. These include put spreads, portfolio diversification, and selectivity in credit. Our existing countercyclical positions, including our underweight Australian dollar, our exposure to the Japanese yen, and our S&P 500 put option have performed well during this period of volatility,” the bank added.