But what about a complete breakdown in bilateral negotiations? Here, the
negative impact on China would still be manageable. Total sales to the U.S.
account for only 3.8% of Chinese GDP. And China would swiftly move to
support economic activity with large fiscal and monetary support.
In China – whisper it – domestic policy matters more than trade wars. With
or without a trade resolution, policy is already set to drive China’s
cyclical recovery. Reflationary efforts since mid-2018 are now showing up
positively in the data. GDP expanded by 6.4% in the first quarter, and
high-frequency macro variables are improving across the board, ranging from
investment and production to retail sales and exports. And, importantly,
the profit cycle in both China and the wider emerging markets is showing
signs of acceleration. Renewed trade tensions simply sustain a heightened
sense of risk, ensuring loose policy.
Most importantly, Trump continues to take a wrecking ball to the U.S.-led
post-war world order and America’s longstanding alliances. Slapping tariffs
on their closest allies will practically chase them into China’s arms. But
there is a longer and more critical strategic reorientation at play: By
withdrawing as the world’s leading country, the U.S. effectively allows for
the emergence and even acceleration of new powers.
Meanwhile, investors will continue to panic over China, citing a history of
volatility, rising debt, and a clumsily managed economy. We get it. China
comes with risks. But leaning on historical precedents when powerful
secular changes are underway rarely serves investors well. Chronic “China
crash” false alarms have diverted attention from the ongoing positive
transformation occurring in what will soon be the world’s largest economy.
The most important facts about China today are not past problems of slowing
growth, heavy-handed intervention, and rising leverage. Rather they are the
shift away from exports and capital spending to consumer-led growth,
improving margins and financial liberalization. These developments take
Looking out further, the ascent of China as an independent economic centre
of gravity is a boon for investors. With diverging economic trajectories
and monetary policies (especially from the United States, which, in the
post-war period, has functioned as the de facto leader of world
order and economic stability), macro trends in China are highly
diversifying. Chinese assets reflect this, showing low correlation to
rest-of-world stocks and bonds.
In recent years, however, there has been limited urgency to diversify
geographically, especially for those overweight U.S. assets (read: almost
everyone). But as China’s market opens and becomes more accessible – in
part facilitated by the development of China-focused ETFs – these
diversification benefits become even more important. Investors should stay
long the Chinese stock market.
We are only in the foothills of a long journey.
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in Forstrong’s
Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
email@example.com. Follow Tyler on Twitter at
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