Despite what appeared to be a thawing of hostilities in this month’s trade talks between the US and China, the market seems divided over whether a deal will be struck between the two economic superpowers during next month’s APEC summit in Chile. There is clear divide between the optimists, who think that a deal will be struck as it’s in both countries interests and those who believe the damage has already been done.
Andy Rothman, investment strategist at Matthews Asia, is clearly on the optimists side. He spoke yesterday at an event and stated that he believes all tariffs will be lifted and even if there is only a partial resolution, ‘as long as we get back to where we were two years ago, it is satisfactory’.
JP Morgan Asset Management’s multi-asset team released a statement stating: “While a narrow trade agreement between the U.S. and China would boost market sentiment, the economic damage caused by previous tariff hikes cannot be immediately undone and trade-related uncertainty will likely remain elevated in the near term.”
To give some background to what has been brewing for some time, Dr Kerstin Braun (pictured), president of Stenn Group, told Fundeye: “Even without this round of tariffs, the US and China were on track for an economic power showdown of some sort. First, there’s the perception of China ‘playing dirty’ and not respecting intellectual property rights, forcing technology transfer and unfairly granting industrial subsidies to Chinese companies. Second, China’s explosive growth threatens the US position as the world’s largest economy.”
However, how accurate is this perception of China ‘playing dirty’ over intellectual property rights (IPR)? Mr Rothman put the issue in context, showing that Chinese royalty payments to the US had risen 19 fold between 1997 and 2017. Furthermore, only 14 percent of US firms said weak IPR protection was a ‘serious hindrance’ to business. Also only 4 pecent of US companies said ending forced tech transfer should top trade talks.
Mr Rothman went on to discuss how much of an impingement to China’s economic growth trade tariffs would actually be, the conclusion seemingly not a particularly significant one. One of the slides during the presentation was labelled ‘China is not export led, so a trade war is not leverage’. To hammer home the point, Mr Rothman displayed a series of figures showing that net exports is only 0.8 percent of China’s GDP compared to domestic consumption which equates to a whopping 76.2 percent.
However, while this may indicate that all is well in China, for global investors the ramifications of an extended trade dispute seems off-putting from an asset allocation perspective. JP Morgan stated: “We expect global growth to be stalled in a phase of subtrend growth amid weakness in global trade and manufacturing. As a result, we maintain a cautious stance on risk assets in our multi-asset portfolios.” This comment seems to be about the general state of the global financial market although was part of the firm’s commentary on US-Sino trade relations. Given that China’s growth has been slowing for around a decade and the US corporate earnings season is widely expected to be disappointing, a wary glance at equities exposure seems a logical conclusion given the size of the two economies.
Dr Braun seemed to have it right with her assertion that the two behemoths are inextricably linked regardless of US President Donald Trump’s attempt to throw a spanner in the works. She told Fundeye: “Whether they like it or not, the US and China are tied together economically. For example, a US shoe importer can’t simply flip the switch and move to a factory outside of China; the volumes are too high and the capacity elsewhere is too low. And China is a key supplier of commodities like rare earths that are difficult to source elsewhere. A prolonged trade dispute could siphon off US access to these materials, which would be a blow to tech giants like Apple.”
Noting the above comment, is it any wonder why the ‘maverick’ President recently stated: “There was a lot of friction between the United States and China. And now, it's a lovefest.” While there may be debate on who is worse hit by an ongoing trade spat, China imports soya from the US (its largest import from the country) and the US is reliant on China for other goods, a resolution seems likely despite the earlier sabre rattling.
