In a Q&A with Neil Dwane, Christiaan Tuntono says China will likely agree to reduce the trade deficit and support IP protections, but not roll back “Made in China 2025”. Mona Mahajan thinks an announced deal should boost US and Chinese stocks, but the markets have already priced in some of this news.
We think China will fix some trade-malpractice allegations to resolve its trade dispute with the US, but it’s unlikely to curb government subsidies or change its long-term strategy to transform its economy
In anticipation of a trade deal, investors should look at the “winners from trade” investment theme: technology, industrials and energy/materials seem likely to benefit from lower tariffs and enhanced global growth
Globally, we continue to favour a “barbell” approach in equities and fixed income across multiple regions, but we believe it’s critical to take an active approach to help manage risks
In this late-cycle environment, we believe investors should remain active, continue the “hunt for income” across asset classes and focus on ESG factors to seek additional downside protection
Trade has been a signature political issue for US President Donald Trump, who imposed steep tariffs on China before recently extending an olive branch to Chinese President Xi Jinping. Where do US-China trade talks stand now?
Ever since President Trump and President Xi reached a temporary truce at the G20 meeting in Argentina on 2 December 2018, the American and Chinese trade delegations have been conducting intensive talks to try to reach a deal acceptable to both sides. Progress reports have been positive enough that Mr Trump recently postponed the original 1 March 2019 deadline. That means the US won’t yet impose a 25% tariff on USD 200 billion worth of Chinese imports. Both sides will reportedly keep working to summarise the new agreements before a possible end-of-March meeting between Mr Trump and Mr Xi to conclude the negotiations.
Even if the issue of tariffs gets resolved now, is there a risk of another flare-up? And what about longer-term structural issues – like US accusations of China’s intellectual property (IP) theft and unfair trade practices?
China’s alleged trade malpractice is at the core of the negotiations, but there are actually many individual issues on the table. Below is our view of the United States' demands on China, ranked in order from easiest to most difficult to resolve. We think there is a 50% chance of reaching a “partial” deal that addresses items 1-2 and some structural issues, such as IP protection. We see a 40% chance that the two sides will reach a “comprehensive” deal that addresses items 1-6. But we think there's only a 10% chance that the US and China will fail to reach any deal.
Some US demands will be quite hard for China to meet
Degree of difficulty to negotiate
What the US is demanding of China
Easiest to resolve
Increase purchases of US imports
These address America’s trade deficit with China; China seems more flexible on these points.
Increase market access for US companies
Strengthen intellectual property (IP) protection
These affect tech protection for foreign companies operating in China. It may gain long-term benefits by yielding some ground, but it won't trust America's goal of unilateral enforcement.
Stop forced transfer of technology
China’s integrity is at stake here. It has denied US accusations and will find it hard to admit to wrongdoing. But if China makes concessions on these points, both sides could halt covert operations.
Curb non-tariff barriers
Curb government subsidies
China still has a state-led economy, and is committed to transforming it to grow out of the middle-income trap. It is unlikely China would compromise here.
Hardest to resolve
Roll back/revise “Made in China 2025”
What are your insights into the economic and market implications of a trade deal?
We believe a partial or comprehensive deal would be received favourably by risk markets globally. The trade wars have been a dark cloud over the global economy and have created uncertainty around trade, corporate spending and supply-chain management. If China and the US are able to reach an agreement, this overhang would be lifted to some degree. Perhaps we would even enter a more open environment for global trade and China's markets. In this scenario, both US and Chinese equities could respond well, the renminbi might strengthen and the US dollar could stabilise. Emerging markets and international equities could also benefit from an overall risk-on environment.
However, as we get closer to an actual deal, it will likely continue to get “priced in”: equity markets in the US and China have already done quite well this year, up 11% and 26%, respectively, as at 26 February. During the same time period, the renminbi rallied about 2.5%, the US dollar softened about -0.5% and emerging markets returned around 12%. So while a deal carries some potential upside, investors should note the extent to which this outcome has already been factored in by the markets. Any further upside may come when the markets see signals that growth has stabilised – not just in the US and China, but globally.
What should investors do? How should they position their portfolios?
We think investors should continue to incorporate the “winners from trade” theme, investing in sectors such as technology, industrials and energy/materials. They should benefit not only from lower tariffs, but also from prospects for enhanced global growth. Globally, we continue to favour our broader “barbell” approach in equities and fixed income across multiple regions. The US remains an economic relative outperformer among developed-market peers, while China and select emerging markets should benefit not only from a trade deal, but from ongoing Chinese stimulus, a potentially stable or softer US dollar, and more attractive valuations.
But even if trade-related uncertainty were to lift, investors would still face a late-cycle backdrop of slowing global economic growth and increasing accommodation from central banks. In this environment, risk assets may perform well, but with higher levels of volatility and greater dispersion between the winners and losers. This leads us to suggest a three-pronged approach for investors:
Actively invest across asset classes – equities, fixed income and alternatives – to identify winners and losers, generate potential alpha and help manage risk.
Keep up the “hunt for income”: With lower rates and generally low inflation globally, the biggest risk may be to avoid taking risk. Investors should consider maintaining exposure to risk assets to meet income and return targets, and to help guard against wealth erosion over time.
Seek more active downside protection, perhaps by incorporating environmental, social and governance (ESG) factors as an additional risk-management tool.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. There is no guarantee that actively managed strategies will outperform the broader market. Environmental, Social and Governance (ESG) strategies consider factors beyond traditional financial information to select securities or eliminate exposure which could result in relative investment performance deviating from other strategies or broad market benchmarks. The impact may be greater with longer-duration bonds. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.
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Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.
Ms Mahajan is the US investment strategist and a director with Allianz Global Investors, which she joined in 2017. As a member of the Global Economics and Strategy team, she is responsible for providing US retail and institutional clients with differentiated investment thought leadership. Ms Mahajan is also a key spokesperson, communicating – both internally and externally – the firm’s high-conviction investment ideas and views from the Global Policy Council. Ms Mahajan was previously a fixed-income portfolio manager, a structured-finance product specialist and a global market strategist at MetLife. Prior to this, she was an emerging-market strategist at Mirae Asset Global Investments; she also worked at hedge fund companies Para Advisors and Ziff Brothers Investments. Ms Mahajan has a B.S. in economics from The Wharton School, The University of Pennsylvania; a B.A.Sc. in computer sciences from the University of Pennsylvania; and an M.B.A. from Harvard Business School.
Mr Tuntono is Senior Economist, Asia Pacific with Allianz Global Investors. He joined the firm in 2018 and is based in Hong Kong. As a member of the Global Economics & Strategy team, Mr Tuntono is responsible for regional economics and strategy research. He works closely with the investment and sales teams in Hong Kong, Singapore and other offices across Asia to present the firm's views to regional clients. Mr Tuntono has had an extensive financial career as a macro specialist, previously working for Credit Suisse, J.P. Morgan and Goldman Sachs in a variety of roles - including as an economist, a foreign-exchange sales representative and a credit analyst. He has a B.Sc. in economics from the Wharton School and a B.A. in economics from the School of Arts and Sciences at the University of Pennsylvania. He also has an M.A. in international relations from the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University.
Cruise bookings trend positively in the US and much of Europe
New ships – as well as promotions, convenience and variety of destinations – are the main factors driving consumer demand, with current bookings for 2H 2018 and 2019 trips up vs. last year in the US and in most countries surveyed in Europe. Spain was the outlier, with mixed bookings.