The asset manager for a changing world
BNP PARIBAS ASSET MANAGEMENT - Clients insurances 1440x300
  • Home
  • A road map for navigating protectionism: the elevator and the staircase

A road map for navigating protectionism: the elevator and the staircase

Investment Insight

BNP Paribas Asset Management
 

Trade war scenarios: tackling volatility and risk-off situations

  • Financial markets have experienced another bout of volatility, this time related to an escalation in protectionism involving the US and China. Should such tensions move towards a fully blown trade war, this would be very damaging for global economic growth and certainly for global financial markets.
  • What is at stake? Globalisation has been a key driver of increased prosperity around the world. However, not all have benefited. Some governments, notably the US government, have started to address trade imbalances as a way to support dissatisfied electorates.
  • A significant reversal in the the free movement of goods, services, labour and capital would curtail global growth and dent financial markets. But it is still unclear how far back the pendulum will swing. Institutional hurdles such as the US Congress, the World Trade Organization (WTO) and financial markets themselves may slow down, limit or even stop the current trade initiatives by the Trump administration.
  • We envisage two possible escalation scenarios.
  1. A multilateral trade war between the US and the rest of the world
  2. A bilateral trade conflict between the US and China.
  • In both cases, we should see a prolonged period of tension. Crucially, at this point, we still see full-scale trade wars as low-probability high-impact scenarios.
  • What is important for investors is how to navigate an escalation or de-escalation. For instance, an intensification could rapidly lead to sudden market moves as investors quickly reassess the probability of a trade war. Alternatively, the risks could escalate in steps, for example, if markets take the view that trade tensions may lead to tit-for-tat retaliation. In a comprehensive note, we provide signposts that should help investors assess potential shifts in markets as protectionism evolves.

Probability of trade wars can evolve in different ways: elevator versus staircase

BNPP AM probability of trade wars

  • In the note, we also delineate the likely economic impact. The combination of tariffs and quotas and a reversal of globalisation would likely lead to higher prices, lower productivity and, ultimately, lower output. We examine the likely response of central banks including how they would view possible second-round effects such as workers pushing for higher wages and higher inflation expectations.
  • We gauge the asset price implications. We look at financial market responses to oil shocks (used as proxies for supply shocks) as well as recent episodes of protectionist escalation. We conclude that equities are the asset class most at risk. The performance of other asset classes is usually mixed, suggesting that the macroeconomic and policy backdrops matter in terms of shaping market responses.
  • As for strategy, we are not altering our base-case scenario of strong growth and contained inflation. While the probability of fully blown trade wars may still be low (below 10%), we do expect further outbreaks of protectionist tension and that makes the trading environment riskier. Higher uncertainty should cause market volatility and risk premia to move higher. If the trade war scenarios remain at a low probability, it would make sense for investors to hedge investment portfolios with assets that do well in risk-off situations, but that do not underperform if these risks fail to materialise.

Also see:

BNP Paribas Asset Management France, “the investment management company,” is a simplified joint stock company with its registered office at 1 boulevard Haussmann 75009 Paris, France, RCS Paris 319 378 832, registered with the “Autorité des marchés financiers” under number GP 96002.

This material is issued and has been prepared by the investment management company.

This material is produced for information purposes only and does not constitute: 1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract  or commitment whatsoever or 2. investment advice.

This material makes reference to certain financial instruments authorised and regulated in their jurisdiction(s) of incorporation.

No action has been taken which would permit the public offering of the financial instrument(s) in any other jurisdiction, except as indicated in the most recent prospectus and the Key Investor Information Document (KIID) of the relevant financial instrument(s) where such action would be required, in particular, in the United States, to US persons (as such term is defined in Regulation S of the United States Securities Act of 1933). Prior to any subscription in a country in which such financial instrument(s) is/are registered, investors should verify any legal constraints or restrictions there may be in connection with the subscription, purchase, possession or sale of the financial instrument(s).

Investors considering subscribing to the financial instrument(s) should read carefully the most recent prospectus and Key Investor Information Document (KIID) and consult the financial instrument(s’) most recent financial reports. These documents are available on the website.

Opinions included in this material constitute the judgement of the investment management company at the time specified and may be subject to change without notice. The investment management company is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio.

Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to financial instruments may have a significant effect on the results presented in this material. Past performance is not a guide to future performance and the value of the investments in financial instrument(s) may go down as well as up. Investors may not get back the amount they originally invested.

The performance data, as applicable, reflected in this material, do not take into account the commissions, costs incurred on the issue and redemption and taxes.

All information referred to in the present document is available on www.bnpparibas-am.com

On the same subject: