The war of words between the Trump administration and China threatens to break out into a full-scale trade war. Franklin Templeton Head of Equities, Stephen Dover, considers the reaction of global investors and puts the current US stock market environment into perspective. And he considers some other issues that are contributing to markets’ cautious sentiment.

Recriminations and retaliations have dramatically escalated the trade tensions between the United States and China in recent days, creating volatility in global equity markets.

The situation has been exacerbated because markets had earlier priced in a short-term resolution to trade tensions on the back of emollient words from both sides in recent weeks. The escalation in tension into a potential full-scale trade war between China and the United States clearly creates uncertainty, but when we talk directly to management of companies in China, we feel more positive about the situation longer term. While we’re optimistic that there’s scope for some short-term negotiated settlement to this latest skirmish, that should be positive for the markets, it seems clear to us that there are long-term geopolitical issues between the two countries that have no short-term fix. As a result, we believe investors need to take a longer-term view on China and trade issues.

Changes in Global Markets and Their Impact on Equities

Uncertainty over China, and its influence over the fortunes of the US and global economies, is just one of the issues casting a shadow over investor sentiment. But we believe there are several reasons to continue investing in equities as corporate and economic fundamentals are generally holding strong. We view market volatility as a buying opportunity because we take a long-term view as investors.

China’s Role in the Global Economy

China has become such a large component of the global economic growth, so we think it merits individual consideration. Notwithstanding the tough line that the Trump administration is taking on trade, we think the outlook for China may be more positive than markets are suggesting.

While many observers fear a slowdown in China’s rate of economic growth, it’s important to keep in mind just how big its economy is, and how many tools the government there has to stimulate it.

Already this year there have been signs that the trade tensions with the United States were helping to focus the minds of policymakers and corporate leaders in China, prompting tax cuts and other fiscal liberalization measures.