Trump broadsides negotiations
Renewed trade tension has stepped up a gear again. Prior to last weekend’s escalation China US negotiations were moving ahead – albeit with a lot of smoke and mirrors around a final deal with conflicting statements on the time line being made by both the Chinese and the Trump administration. Indeed, successive rounds of talks had raised expectations on a partial deal on tariffs in phase one of the trade deal. This was beginning to be discounted as the base case in markets and was one of the key catalysts behind the sharp rally in China risk assets – the other being the roll out of China’s fiscal and monetary stimulus.
The sudden announcement by President Trump that the tariff rate on the $200bn tranche of imports into the US from China would rise from 10% to 25% took the market by surprise. This could well be a negotiation tactic ahead of the upcoming Chinese delegation scheduled visit to the US later this week, which many believed could be the final round before an initial agreement.
We believe the situation remains unclear on the trade dispute. A pause in new tariff hikes if announced would be a positive development. However, inking a deal on phase two which encompasses the more thorny issues of intellectual property, industrial subsidies, access rights of foreign companies in areas like cloud computing are unlikely to be resolved so quickly. Enforcement mechanisms on how to monitor trade pledges are also currently being ironed out.
Overall, we are leaning on the side of caution as we believe a recalibration of the trade relationship between the two countries is likely to be a more long drawn out process. A change in the US stance on Huawei is also something to watch – it is not expected any time soon. Thus the broader friction on technology is unlikely to be resolved fully in the very near term. The fact that this a politically charged issue on both sides makes both the timing and the outcome of these negotiations more unpredictable.
Portfolio positioning and activity
The All China Equity Strategy is not significantly exposed to trade cyclicals. These type of companies form a very small part of our investment universe today as they have shrunk in importance. The portfolio is largely focused on the domestic economy. As a rule, we do not invest on geo-political thematic grounds leading to any top down decision to buy or avoid trade cyclicals.
The portfolio remains invested in a high-conviction list of ideas highlighted by our quantitative screen. In Phase two of our process, we conduct our fundamental due diligence, in this case quantifying any material risk from tariffs or sanctions. We believe our consistent execution of this strategy will help us generate alpha over the medium term, regardless of the trade friction which is likely to come and go in waves.
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