https://www.barrons.com/articles/trump-xi-g20-trade-talks-investing-51561596075
Trump and Xi Are About to Meet. How to Invest if Trade Talks Go Well — and if They Don't.
Reshma Kapadia
Photograph by Sean Gallup/Getty Images
The bar is set low for the meeting between President Donald Trump and Chinese President Xi Jinping and at the Group of 20 summit in Japan on Saturday. Many strategists and fund managers are just hoping tensions don't escalate and that the two sides continue their trade limbo, though many are also crafting a playbook for what could be a contentious long-term relationship.
After trade talks were called off in May, the relationship took a turn for the worse, with the U.S. adding Huawei Technologies—a global telecom gear maker and Chinese national champion—to its entity list. That prohibits U.S. companies from selling Huawei technology or components such as chips unless they get special government approval. Chinese officials also took a more strident tone after talks broke off and threatens its own blacklist. Last week, the U.S. added more names to the entity list, restricting five Chinese developers from access to American technology and reduced licenses to U.S. companies that hired Chinese nationals.
But the latest read of the prep ahead of the meeting suggests the two are trying to put a more positive spin on the situation, with the U.S. willing to delay the next round of tariffs on the remaining $300 billion of Chinese imports and some agreement to dampen the tit for tat that has roiled markets. The conflicting developments has pushed many strategists to lay out two different scenarios for clients. Here's what it could mean for your portfolio.
The optimistic view
The prevalent view is that both sides try to de-escalate the situation. Kathleen Gaffney, director of diversified fixed income at Eaton Vance overseeing $18 billion, says in an interview that she expects both sides to walk back the trade war. Two related factors for that expectation include the upcoming U.S. election, and blue-chip companies are telling Trump how the trade war could hurt U.S. consumers and confidence. From China's perspective, the mass protests in Hong Kong over China's control of the city is spilling over into Taiwan's upcoming election, contributing to a poll boost for the pro-independence incumbent President Tsai Ing-wen, Gaffney says.
No one expects a comprehensive trade deal out of this meeting, but Matthews Asia investment strategist Andy Rothman expects "positive language" from both leaders about their determination to reach a deal and a resumption of talks. While it would be a surprising move, the U.S. could roll back the tariffs it raised from 10% to 25% on $200 billion in goods, in return for the Chinese making some concessions, said David Dollar is a senior fellow in the John L. Thornton China Center at the Brookings Institution, at a briefing on Monday.
Read our recent cover story: The Trade War Will Make Stocks Scary. 5 Reasons Not to Panic.
The recent dovish moves by the Federal Reserve and other central banks could mean good news on the trade front creates inflationary pressures. "At full employment and valuations priced for perfection, the risk is an inflation surprise. In these markets, it's not about reaching for yield and assuming things will be status quo," Gaffney says. Her playbook: Own cash and currencies like the Australian, Canadian, and New Zealand dollars that are both liquid and geared toward inflation, as well as local emerging-market debt in countries working on economic reforms like Mexico or India. Stay away from long-duration Treasury bonds, and dollar-denominated emerging-markets debt.
The pessimistic view
If the two sides don't make nice—and U.S. goes ahead with more tariffs, UBS economists and strategists wrote in a report that more antagonism could be a "shove too far" for an already-fragile global economy. An escalation is not the bank's base case, but if it happens, they expect global growth to take a 0.75 basis-point hit over the next six quarters. It could look like a mild global recession similar to the eurozone crisis, the oil collapse in the mid-1980s, or the Tequila Crisis in the 1990s. That would in turn lead all major central banks to ease monetary policy, with the Fed cutting an additional 100 basis points on top of the 50 basis-point cut expected in July, which could keep the U.S. from a recession, the strategists and economists write.
Emerging markets will suffer the most, though Chinese stocks should hold up better, in part because of the stimulus Beijing can provide. Also helpful: China's net exports—the value of what it exports minus the value of its imports—is less than 1% of China's GDP, down from 9% in 2007, and more than half of its GDP now comes from domestic consumption, according to Matthews Asia's Rothman.
Even if the G-20 talks don't take a more negative turn, former policy makers and companies are keeping an eye on what is expected in the coming months in terms of technology policy. Specifically, observers want to see the language the U.S. uses in defining what is "emerging and foundational technology" essential to national security that could outline what other companies are caught up in the evolving tech battle between the two countries. The language around rules related to foreign direct investment, which are expected out late fall, and the language used in its implementation of the executive order that bans foreign telecom gear.
Until that language is ironed out, technology companies are going to be in limbo. "The uncertainty about what is going to happen can be more harmful than the changes that come down," says Kevin Wolf, former assistant secretary of commerce for export administration in the Obama administration who now advises clients at Akin Gump and has been warning about a possible Balkanization of technology.
Some form of a truce could lift the market in the short term, Morgan Stanley strategist Michael Zezas wrote in a note that any good news around a de-escalation could offer an opportunity to sell. The differences between the two sides aren't going to be easily bridged, even if there is an impasse, and that market declines or economic weakness may actually be necessary to make a pause permanent, he wrote. In the interim, the latest deterioration in manufacturing data shows the hit corporate confidence has taken, especially in the U.S., China, and Korea. "The benefits of a pause lie mainly in its ability to delay, but not resolve, downside risks to economic fundamentals," Zezas wrote. "We'd view this more as a setup to sell risk than a catalyst to turn more bullish."
Write to Reshma Kapadia at reshma.kapadias@barrons.com
The bar is set low for the meeting between President Donald Trump and Chinese President Xi Jinping and at the Group of 20 summit in Japan on Saturday.