As we wrote in our recent
Equity Monthly update, we are still in a macro environment where bonds typically have outperformed equities, so investors should still be defensive and underweight equities relative to bonds. The best way to play the trade war on the downside is through indirect exposure to China. The Chinese government will now use every tool available to stabilise the market: as such, thus investors should avoid shorting Chinese assets. Using indirect exposure via Japan, South Korea and/or other Asian asset classes (or even Europe, which is very sensitive to China) is a better way of expressing a negative view if the trade war escalates further.
South Korea at odds with calm markets We highlighted South Korea as one of the key countries to watch for clues as to where the economy is headed. The Organisation for Economic Co-operation and Development’s leading indicators are suggesting a turnaround, which could turn out to be false, and Samsung has recently sounded upbeat on demand for memory chips. The country’s exports to China have also improved considerably over the past couple of months, but is it merely set to stabilise at low-growth levels? The currency is sending a worrying signal (as it has all year, oddly), but today's price action indicates that investors are not fully buying into the 'China stabilisation' narrative just yet.
Either South Korean equities and KRW are mis-pricing risk and macro, or everyone else in global equities (mainly US equities) are wrong in terms of direction. We argued last week that investors should profit or hedge risk as we believed that equities were discounting an overly positive near-term future.
