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Trump, Xi Call Tariff Truce - Wealth Managers' Reactions

Tom Burroughes, Group Editor , December 4, 2018

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While the rally on the talks' outcome has been brief, wealth managers have expressed their relief at the outcome of the G20 gathering. Here's a collection of reactions.

Equity markets rallied yesterday - although fell back today - with the news that President Donald Trump and Chinese President Xi Jinping had agreed to a 90-day delay in tariffs, which the White House had planned to impose on Chinese exports at the start of 2019. While the threat of rising protectionism has not gone away, and has been a nagging worry for investors for the past year, the move at the Group of 20 summit at the weekend gave wealth managers something to cheer about. As at the time of writing there are some doubts creeping in, taking indices lower today. 

After the news came out a number of wealth managers reacted. Here is a selection.

Aninda Mitra, senior sovereign analyst at BNY Mellon Investment Management

The big news from the Trump-Xi dinner is that higher tariff rates as well as a broadening of the base of tariffable goods are going to be suspended for at least 90 days. More details are still awaited. But I would see this is as a short-term risk positive development and safe havens should underperform in coming days. The markets will be elated. However, I would look out for the details and keep an eye on the 90 day+ horizon.

To be sure, underlying problems remain unresolved. It is not as though existing tariffs are on the verge of being unwound. But what Xi has managed to extract from Trump is a stay on any escalation for three months. That interlude should see a stronger effort to set a framework for more talks and quid-pro quos.

However, I remain mindful of the broadening bi-partisan scepticism on the US end about its worsening relationship with China. The Chinese views are also coalescing around the notion that the US will simply not tolerate another nation to rise, to the extent where US hegemony in Asia can be seriously challenged. The three-month extension must therefore be seen in the context of the “promise fatigue” of the US authorities and Chinese wariness about eventual conflict (if not outright hostility) becoming inevitable.

Raymond Ma, portfolio manager, Fidelity China Consumer Fund

Asian equity markets and US stock futures rallied following US President Donald Trump’s decision to hold off raising trade tariffs on $200 billion of Chinese goods. The temporary truce makes a deal more likely, which would ultimately benefit both countries. 

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.

Chief Investment Office, DBS

Taken together, the outcome of this meeting can be seen as a win-win situation for both countries. For the US, a pause in trade hostility would pave the way for it to export soy beans. In the case of China, the near-term truce provides some breathing space for the country in a time when macro conditions are starting to deteriorate.

A temporary reprieve, but this is good enough for risk assets. The trade truce is merely a stop-gap measure as fundamental issues surrounding intellectual property theft remain unresolved. Make no mistake, things could turn either way three months down the road. But still, this is good enough for risk assets for the time being, given that expectations leading up to the G20 meeting were extremely low. Global equities have undergone substantial corrections since October, predominantly on the back of trade fears and tightening monetary conditions. With both parties opting for a three-month truce, we believe that risk assets could trend higher for the rest of 2018, particularly in markets and sectors that have seen sharp pullbacks since the October sell-down.

The other catalysts: subdued oil prices and a dovish Fed. With tension surrounding the trade war put on the back-burner for the moment, we expect investors to divert their attention to monetary policies. To recap, the market is concerned about the Federal Reserve’s tightening pace in 2019. But in a recent testimony, Fed Chair Jerome Powell said that the policy rate is currently “just below” the neutral level that will cause growth to neither accelerate nor decelerate. On balance, this could potentially signal a dovish tilt in the Fed’s overall monetary stance.

Mark Haefele, UBS Global Wealth Management chief investment officer, UBS

While President Trump described the bilateral meeting with China as "amazing and productive," we believe the rivalry between the US and China will not be easily overcome, especially over the issue of intellectual property and market access. A breakdown of talks will remain a risk for markets and the global economy. US trade relations with other partners also remain tense, and we will continue to monitor the White House threat to impose additional tariffs on car imports, which would represent a significant headwind for the large German and Japanese auto sectors.

However, the delay in the tariff rate increase is a positive development relative to our base case and the meeting managed to avert a significant escalation that could have deepened the recent sell-off in global equities. A negative outcome could have included the swift imposition of a third round of US tariffs on an additional $267bn worth of Chinese goods. This further round of tariffs would have targeted China's higher value-added IT products and inflicted greater disruption on global supply chains.

The outcome of the G20 meeting supports our moderate risk-on stance. We added to our overweight in global equities after November's US mid-term election on the view that markets had adjusted to better reflect concerns over slower economic growth and the escalation of the trade conflict. In the past week we have learned that both the Trump administration and the Federal Reserve are not dogmatically pursuing policies without regard to the market and economic impact. We remain overweight global equities and US-dollar denominated emerging market sovereign bonds. Yet we also continue to expect heightened volatility around policy and economic news. As a result, our equity overweight is balanced with counter-cyclical positions – including an overweight to10-year US Treasuries and the Japanese yen versus the Taiwanese dollar.

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