Monday’s chat between US and Chinese trade negotiators is once again fanning hopes of a favourable outcome to a meeting between US President Donald Trump and Chinese President Xi Xinping at the G20 summit in Osaka, Japan, this weekend.
But the economic stakes are high and the expectations bar is being set low by investment experts.
“The recent carrot and stick approach from both China and the US on issues relating to trade, technology and North Korea, suggest that an outright breakup of talks at G20 meeting is unlikely,” said Anthony Chan, chief investment strategist for Asia at Union Bancaire Privee in Hong Kong.
Even so, the most likely outcome would be an extended truce with talks resuming and existing tariffs remaining, he said.
Trump has said he would impose tariffs on a further US$300 billion of Chinese goods if the meeting with Xi isn’t fruitful. That and the prospect of retaliatory tariffs by China would mean virtually all trade between the biggest trading partners to the world would be subject to tariffs.
That would increase the risk of a global economic slowdown, perhaps even a recession, especially if a continued souring of relationships led to non-tariff retaliation and even military tensions.
Fitch Ratings calculates that the imposition of fresh tariffs alone would reduce world economic output by 0.4 percentage points in 2020. Chinese growth alone would slow by 0.6 percentage points.
As a result, global GDP growth would come in at just 2.4% next year, Fitch said.
César Pérez Ruiz, chief investment officer at Pictet Wealth Management, told AsianInvestor he is inclined not to take any chances.
“Given the history of their discourse, the only thing that seems sure is that the outcome could fall anywhere on the spectrum from game-changingly negative to positive where it comes to trade and the global economy,” Pérez Ruiz said.
In view of that wide-ranging risk, UBP favours gold and the Japanese yen as safe-haven trades while seeking increased protection in stocks through structured products and investing via hedge funds, said Chan.
HALF-EMPTY, HALF-FULL
Gold bullion prices hit a six-year high on Tuesday in London, although it was as much a function of the weaker dollar and US tensions with Iran as it was to do with US-China worries, traders of the yellow metal said.
For equity markets, in contrast, the glass appears half full with share prices creeping higher this month, in part due to a growing trade-related optimism, buy-side analysts said.
“Investors' optimism about the good news we have gotten so far, that talks between presidents Xi and Trump will occur, has already been priced in at least into US equities (and perhaps overdone as this confirmation was not new news and talking, while good, is not a major move forwards)," Hannah Anderson, global market strategist at JP Morgan Asset Management, told AsianInvestor via email.
The inference here is that there is room for market disappointment.
“The market is, in my view, still pricing some sort of eventual resolution, so there would still be a significant negative impact if talks completely collapse,” Craig Botham, a London-based emerging markets economist at fund house Schroders, said.
It's no surprise, therefore, that some investors are not looking to make any new bets one way or the other.
“I haven't done huge repositioning,” due to the broadness of the scope of potential outcomes, said Claudia Calich, an emerging markets debt fund manager at M&G Investments.
Markets would want “a more clear sense of resolution” as a delay in deciding whether the US will impose tariffs on a further US$300 billion of Chinese goods would only be akin to “kicking the can down the road with additional time,” she told AsianInvestor in an interview whilst visiting Hong Kong.
“Given this very short-duration, noisy behaviour in markets, our response is to change very little, maintaining a very long-term time horizon,” said Naomi Waistell, another London-based portfolio manager, this covering emerging and Asia-Pacific equities at Newton Investment Management.
But given we're “very long-term”, she added, we would view a sell-off in China as offering “highly attractive” entry-points into specific stocks.
In any case, most of the fund managers AsianInvestor spoke to agreed that Chinese assets, particularly onshore ones, would benefit from the stimulus measures Beijing will likely roll out if trade talks fail.
That could yet benefit other Asian markets too, seeing how big a consumer China is these days, not least for raw materials.
However, the People's Bank of China is "unlikely to be too aggressive” as that would lead to the depreciation of the renminbi versus the US dollar, which would likely attract more tariffs, said Nikko Asset Management’s chief global strategist John Vail.
All of which reinforces the dilemmas investor face when trying to position themselves around the issue of global trade and US-China relations as Trump continues his pushback against the decades-old forces of globalisation.
