Overview
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Trade tensions had spurred a sell-off in Chinese equities earlier this year as investors worried about the earnings growth outlook for Chinese corporates. A pause in the escalating trade spat will stem any further tariff-related economic losses.
However, if no deal is reached in the agreed 90-day period, Trump will follow through on threats to hike tariffs from 10 per cent to 25 per cent. If this happens, we estimate it would shave 0.7 per cent off China’s 2019 GDP growth vs. the 0.5 per cent reduction from current tariffs.
Trump had previously threatened tariffs on a further $267 billion of Chinese goods. But recent stock market volatility, continued tightening by the Federal Reserve, and US soybean crops previously destined for China rotting in fields might have given him pause.
China also stepped up during the weekend discussions between Trump and China’s president Xi Jinping in Buenos Aires, agreeing to buy a ‘very substantial’ amount of agricultural, energy, industrial and other products from the US, according to the White House. The two countries will also hold new talks on technology transfer, intellectual property, non-tariff barriers, cyber theft and agriculture.
More broadly, we see increasing opportunities among Chinese stocks amid the retreat in valuations this year, as the economy becomes more consumption-driven and corporates sharpen their focus on shareholder returns (see 27 Nov. blog from Jing Ning).
The Asian fixed income market has been relatively muted and volatility is likely to persist. Even if the G20 agreement proves short-lived, we see good value in Asian investment grade bonds. Spreads are at multi-year highs, with yields at levels not seen since 2009.
