Dear John

Growing up, we used to play with cars and planes. Ford Mustangs and F16 Fighter planes were high up on the list of birthday toys one could dream of. American icons. The strange thing was, on the underside of almost every one of these toys, three words would appear: “Made in China”. That used to be a phrase synonymous with low cost, and often low quality, goods but times have changed. China isn’t playing around anymore.

As US Vice President JD Vance rightly observed, “it turns out, the geographies that do the manufacturing of things get awfully good at the design of things”.  From toy cars to competing head-on with the Japanese & German automakers, Chinese Electric Vehicles are nothing short of impressive. Build quality and reliability have improved materially with the latest technology being rolled out across the Chinese fleet. This isn’t just the case on the streets in Shanghai; walk to Berkeley Square in London and you’ll see the high-end motor brands of Ferrari and Bentley… and BYD.

Tariffs on the rest of the world are unlikely to see a re-industrialisation of the United States in the short term. Labour costs make it prohibitive. Thirty-five thousand Volkswagen workers in Germany will be let go in the coming years. Plans are for those jobs to move to Mexico. The alternative was too much for unions to contemplate; at least three VW factories would have to shut in the heart of Europe’s most industrialised economy. Chinese EVs, even after Europe’s tariffs, are simply much better value for money.

Not only have they transitioned from toy cars to vehicles, sightings of sixth generation Chinese fighter jets have been circulating online in recent weeks, as the world’s second most populous nation flexes its military muscle. China is also manufacturing commercial aircrafts to compete with Boeing and Airbus. The country’s recent announcement that it would halt orders from the American manufacturer sends a retaliatory message on tariffs but might be alluding to another matter altogether. They don’t need Boeing. In the short term, that will hurt – but it might be medicine worth taking. Their commercial aircraft programme that kicked off in 2008, saw the COMAC C919 narrow-body airliner take flight in early 2017, and if there’s one thing that China has proven to the world, it is that they have an unmatched manufacturing capacity.

The “Liberation Day” tariff announcement, when considered through this lens, is likely a Dear John from across the pacific. Something had to give. Debt sustainability in the US, ever increasing trade deficits and wealth inequality are just some factors that have made Washington realise that a course correction was not only required, but urgent. The relationship between the two largest economic superpowers has changed and a fragmentation of the post-World War Two order is unfolding.

This, for obvious reasons, has introduced risk into global capital markets. Probabilities for poor corporate earnings, higher inflation and elevated interest rates have been up weighted by investors. The changing landscape has however seen strategies that are uncorrelated, or those that benefit from increased volatility, come to the fore. We believe that these investments will continue to protect and compound investor capital in these uncertain times.