Eq: China (4)
Investors have been jolly lately about the progress made in the trade war. Ever since Trump’s announcement of a “phase 1” deal a few weeks ago, trade war concern has been diminishing, with markets rising accordingly. However, there was a reality check today as China made worrying comments, saying that they don’t think any long-term/substantial deal would be possible with Trump, and that they are even worried about him backing out of a simple short-term deal because of his “impulsive nature” (from Bloomberg).
FINSUM: Talk about throwing cold water on something. That said, none of these comments—positive or negative—mean too much. What ends up on paper matters more.
Will the US and China make a substantial trade deal? That is a trillion Dollar question for markets. Some argue that China may defer doing any deal and take the risk that Trump does not win the election, effectively letting the clock run out. However, an astute view is that China might be desperate to do deal while Trump is still in office. The reason why is that if Trump were to lose to a Democrat, who in all likelihood would be a more conventional US president that takes a much friendlier approach with international allies, then China would be in a very compromised position. A Democratic president would likely approach the Chinese trade deal with a much more united front of trade allies, which would be a worst case scenario for Beijing.
FINSUM: The irony of this is that Trump has been by far the hardest president on China in memory, but at the same time, the Chinese have the best chance at a good resolution by dealing with him.
New data out of China suggests all is not well. A gauge of Chinese factory output fell to its lowest level in two years. The news arrives at the same time as the country is in a bear market. The data is particularly important because it shows the China’s economy is under pressure from US tariffs even if the direct effect has not showed up in trade data yet. One Chinese economist for ANZ Bank says “The economic conditions facing China’s private sector is much worse than what the headline figure suggests … Besides an expected reserve requirement ratio cut next January, we expect future supportive policy actions to be measured. The government’s priority is to avoid a financial blow-up”.
FINSUM: We think China is going to once again undertake stimulus measures to support the economy, but this time they will be facing a less accommodative trade environment.
If you or your clients own any Chinese focused ETFs, you will have noticed a glaring fact—they have hugely variant returns even when the underlying holdings don’t seem that obviously different. China is a study in how different index weightings and configurations can impact returns. For instance, Chinese stocks as a whole have fallen 21% this year, however the 40 or so Chinese focused ETFs in the US market have ranged from a 5% positive to negative 40% return. Even seemingly broad ETFs, like the iShares Large-Cap ETF, have very varying results, as despite the 21% fall, that ETF only dropped 13%. This is because it has a 50% weighting towards financial stocks, which were largely unscathed.
FINSUM: The key point here is to know what you are buying. Each of the indexes being tracked are quite unique, even if you think you are just buying a broad “China ETF”.