global perspectives
US, China move towards trade deal – Positive EM
Going into the G20 meeting late last year, we formed the view that the US-China trade war was likely to see major de-escalation in coming months. This has now more clearly played out when US President Trump delayed the March 1 deadline for the US to increase tariffs on $200 bln of imports from China. Although the length of the extension has yet to be specified, we expect at least a two-month delay, with likelihood of further “substantial” progress after the planned meeting between President Trump and Chinese President Xi Jinping in the second half of March in Florida.
In recent days, the deadline delay had become a base line scenario for many market participants. Still, the issues on the table - intellectual property, services market access, currency, non-tariff barriers and agriculture - are thorny and views remain divergent.
We highlight two important forces which that we think are incentivizing both sides to come to an agreement:
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From China’s perspective, the trade war with the US has inflicted severe growth damage, especially because it escalated at a time when economic de-leveraging was the main policy focus. More strategically, the trade dispute with the US exposed the dependencies of a trade-based growth model and its vulnerability when it comes to China’s ambition to become a global superpower. |
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From the US perspective, the trade war has brought to the surface long-held suspicions regarding China’s long-term ambitions in certain security-focused stakeholders. This includes the giant leap the country has taken in the field of artificial intelligence in recent years. Indeed, the alignment of various US interests (the Trump administration, hawks such as John Bolton, Peter Navarro and Robert Lighthizer and multi-national companies) has been a major development, with long lasting implications for the US-China relationship. In the short-term, US presidential elections next year, and President Trump’s need for a viable narrative against a backdrop of a divided congress are important incentives for short-term resolution of this issue from the US side. We believe such short-term resolution is likely to be focused on the current account, given the transactional thinking of President Trump. |
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As such, we expect a more concrete resolution - even if it only lasts until the next US presidential elections - to come through by spring. As noted above, we see the closing of the current account balance being the main anchor of the deal. |
From an investment perspective, we have been and remain positive on, emerging market (EM) assets, especially Chinese equities where we see value, as some of the major risk factors recede. The EM macro environment has also been helped by the market-induced pivot in the Federal Reserve’s policy stance, as signaled in the latest Fed minutes and previous FOMC meeting in the form of both reducing the balance sheet unwind, and ending such an unwind sooner than previously planned. We continue to expect that EM equities will outperform developed market equities in coming months. We also see value in EM local currency debt as the dollar remains range-bound, with positive implications for Asia corporate credit as well.
