The intensifying trade war between the U.S. and China has hurt the equity outlook for both countries, as traders brace for what could be a painful and drawn out negotiating process. Both markets have suffered severe drawdowns this month, though they’ve recovered somewhat from the losses immediately following President Donald Trump’s April 2 announcement. The S & P 500 , which earlier this month briefly crossed into bear market territory, now sits roughly 14% off its all-time high and is more than 10% lower in April. China’s Shanghai Composite is about 10% below its 52-week high and is down by about 1.6% month to date. Some of the biggest voices on Wall Street are calling for negotiations between the two countries, warning tariffs are stagflationary for the U.S. and deflationary for other countries including China. On Tuesday, JPMorgan Chase CEO Jamie Dimon told the Financial Times that Washington should engage Beijing, saying, “it doesn’t have to wait a year. It could start tomorrow.” But investors are bracing for further pain in the near future, carefully choosing equities to withstand the volatility that could spell a wider range of potential outcomes for the overall market. “Eventually, there will be a deal, eventually there will be much lower tariffs, but it’s going to be very long and tough process of negotiation,” said Arthur Budaghyan, chief strategist of emerging markets and China at BCA Research. “China is not going to concede to U.S. demands right away.” Budaghyan said that he’s downgraded exposure to China equities last week to underweight from neutral, on fears of an impending global economic slowdown. Elsewhere, Goldman Sachs’ Kinger Lau also revised his MSCI China target to imply 12% upside over the next year, though with a wider range of potential outcomes over the period. Lau’s new risk case scenario, in which a global recession materializes, points to a 20% decline. On the flipside, a trade deal between the two countries could mean upside of as much as 35%. Picking quality positions China’s response to Trump’s tariffs suggest trade tensions between the two countries will continue for some time, given the levers Beijing has to pull by stimulating an economy , and strengthening ties with other trading partners. This week, Chinese President Xi Jinping has taken the opportunity to tour through Southeast Asia , visiting Vietnam and Malaysia. That has helped stabilize the worst of the sell-off in the China equity market, and bolsters the outlook for A-shares that are traded on Chinese exchanges as opposed to H-shares that are traded on the Hong Kong Stock Exchange, according to Goldman Sachs. Some stocks that could benefit from government easing include BYD Electronic, a maker of high-tech products including mobile handsets, or Haier Smart Home, a smart home appliance company, according to Goldman Sachs. Kai Wang, senior equity analyst at Morningstar, said he’s being “even more selective than normal” to find undervalued, quality names in a volatile period for equities. However, he noted that much of the Chinese economy is showing growth that is underappreciated by U.S. investors. “There are aspects of the Chinese economy that are still seeing challenges, like the real estate sector, but I don’t think the economy is as dire as we think it is, or as many US investors think it is,” Wang said. “There are pockets of robust growth, still.” Among those quality names are Singapore-based ride sharing company Grab and Chinese liquor company Kweichow Moutai , he said. The iShares MSCI Emerging Market ETF (EEM) could also be attractive to retail investors who are seeking exposure to China, without direct exposure to its stocks. Get Your Ticket to Pro LIVE Join us at the New York Stock Exchange!| Uncertain markets? Gain an edge with CNBC Pro LIVE , an exclusive, inaugural event at the historic New York Stock Exchange. In today’s dynamic financial landscape, access to expert insights is paramount. As a CNBC Pro subscriber, we invite you to join us for our first exclusive, in-person CNBC Pro LIVE event at the iconic NYSE on Thursday, June 12. Join interactive Pro clinics led by our Pros Carter Worth, Dan Niles, and Dan Ives, with a special edition of Pro Talks with Tom Lee. You’ll also get the opportunity to network with CNBC experts, talent and other Pro subscribers during an exciting cocktail hour on the legendary trading floor. Tickets are limited!
