Was the phase I trade deal a big deal?

You’ve read the headlines – the first phase of the US-China Trade pact has been signed between the two largest economies in the world after they first slapped tariffs on each other in July 2018.

Photo: MoreThanShipping

Was the phase I trade deal significant? I explore deeper.

What the phase I deal is

  • China to commit an additional US$200b purchase program from the US over the next two years (till Dec 2021)
  • Both countries affirm the importance of voluntary, market-based transfers of technology instead of forced transfers
  • Currency enforcement of the Chinese Yuan on market-based principles
  • China will allow US financial institutions to apply for asset management licenses
  • China shall eliminate foreign equity limits which will allow banks and insurers to gain more access to the Chinese market

Issues with the phase I deal

  • US$200b of imports is a really significantly difficult target to reach – to put things in perspective, China imported US$185b of US goods in 2017
  • It’s a partial calm at best – a pending phase II deal and lingering uncertainties means limited reason for a significant increase in business spending

What the phase I deal isn’t

  • Mutual trust has not been repaired between the two countries in areas such as technology and territorial disputes
  • Tariffs are still levied and the US is still free to reimpose tariffs: there is still a 25% tariff on US$250b and 7.5% on US$120b of imports from China

Which means for us investors…

  • Political risk, while lower, still remains elevated in light of impeachment risks, US-China unresolved tensions and other geopolitical risks (e.g. Iran, Hong Kong, North Korea)
  • US equity markets have rallied to all-time highs after a ~31% gain last year, with forward price-earnings ratio of the US markets roughly 18.5x
  • Diversified portfolios should remain resilient as global growth outlook improves and central banks around the world hold rates where they are now

There are also headlines that caution that as volatility dampens and equity markets continue marching higher, investors who are positioned too aggressively are vulnerable to a correction shock as headlines might turn sour anytime.

However, in the UBS publication more room to run, UBS advises that the current economic conditions of low inflation and unemployment rates support current US valuation levels and improvements in manufacturing business sentiment could unlock further equity gains.

DBS CIO has also maintained its preference for equities as the only game in town given how bonds still remain expensive compared to equities with the average bond-equity P/E premium surging to 175% and low equity participation rate.

Personally, I also favour equities positioning in light of reduced geopolitical risks, but correction risks from economic and geopolitical surprises remain and would serve as good entry points for long term investors.

Derrick is a digital native, finance geek and avid photographer. He loves spontaneity but is a control freak at the same time.

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