Last updated: May-22-2019

Investors misreading U.S.-China trade tensions
5/23/2019 4:59:45 AM
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Investment management insights from a leading Canadian expert.

By Tyler Mordy  | Thursday, May 16, 2019


What to make of renewed trade tensions? We doubt recent conflict marks a fundamental shift in the global macro environment. First, President Trump’s latest manoeuvre is not altogether surprising, given his proclivity for eleventh-hour pressure tactics. By now, investors should view these policy shifts not as bugs but as central features of the administration’s dynamic.

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 time.

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 Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.

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© 2019 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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