China and the US agreed to a ceasefire to keep their trade war from escalating with a promise to halt the imposition of new tariffs for 90 days after high-stakes talks in Argentina on 1 December following the G20 meetings between US President Donald Trump and Chinese President Xi Jinping, including no escalated tariffs on 1 January 2019.
Ronald Chan, Chief Investment Officer, Equities, Asia (Ex-Japan), Manulife Asset Management, believes the markets have probably seen the peak of trade frictions between the two countries. Markets and sectors that have been most impacted should react positively to the outcome in the near-term, in particular, China A-shares, North Asian bourses, and exporters.
According to the market note from Manulife Asset Management:
President Trump has agreed that on 1 January 2019 he will leave the tariffs on US$200 billion of Chinese imports at the 10% rate, and not raise it to 25% at this time. China will agree to purchase a not yet agreed upon, but very substantial amount of US agricultural, energy, and industrial products. China has also agreed to start purchasing agricultural products from US farmers.
President Trump and President Xi have agreed to immediately begin negotiations on structural changes with respect to “forced” technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, and services and agriculture. Both parties agree that they will endeavour to have the negotiations completed within the next 90 days, and will revisit the tariff issues should the outcome from the negotiations not be satisfactory.
Ronald Chan said the temporary ceasefire on trade tariffs between the US and China was as expected and should be seen as a positive outcome.
Principle agreements reached between the two leaders will provide the framework for details to be worked out in the next three months, especially on intellectual property and non-tariff barriers.
He said that numerous factors contributed to this agreement: pressures have been accumulating on both sides, including China’s slowing macro data, as well as announced auto plant closures in the US and rising cost concerns from US corporates.
Given the above and if the principle framework is maintained, Chan believes that the markets have probably seen the peak of trade frictions between the two countries. Moreover, investors' confidence in markets will be rebuilt. Markets and sectors that have been most impacted should respond positively to the outcome in the near term, in particular, China-A shares, North Asian bourses, and exporters.
Winson Fong, Senior Portfolio Manager, Greater China Equities, Manulife Asset Management, acknowledges that China and Hong Kong equities have been de-rated in 2018, amidst considerable market corrections triggered by the Sino-US trade dispute.
While complete blockage of the Chinese technology sector by the US remains the greatest risk facing companies, particularly in the Greater Bay Area (GBA), Fong echoes that most potential risks have been priced in by the market. Fong believes that improving investor sentiment is a key premise for a market recovery, as equities will be re-rated once concerns over these risks dissipate, and when markets shift focus back to the fundamentals of the GBA companies.
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