The rhetoric that has emerged subsequent to the Trump/Xi meeting in Osaka indicated that the negotiations have been reset, as we had anticipated, and recently there have been suggestions that higher-level talks are now imminent. In our view, there are two underlying issues for US and Chinese negotiations teams to address: the first is related to ‘backward-looking’ issues, that emphasise China’s unfair trade practices that need to be corrected; the second includes forward-looking ones that have more to do with technology. We would suggest that the first ‘agreement’ will try to resolve the former issues, to try to align China’s trade practices with the international norm. The latter issues will likely only be resolved over the next 20 years, but investors ought not be overly pessimistic.
While global markets have been quick to link the recent truce in trade talks to its implications for global growth, we note that the decline in global trade pre-dates the current trade tensions by many years (the decline started in 2012). In our view, economic activities in China will continue to be weighed down both by the slowing potential growth in China – linked to structural factors such as demographics – and Beijing’s commitment to guide the economy onto a less risky path by refraining from opting for powerful but costly Keynesian stimuluses. We note that China’s ‘inter-connectedness’ with the rest of the world is now as significant as that of the US and the EU combined, which means that this L-shaped recovery in China will continue to weigh on global growth. The EU, however, is now more than twice as sensitive to variations in Chinese GDP than the US or the rest of the world is. Our assessment is that the spread between prospective European and US growth will continue to support the premium in US rates and in the dollar, relative to the euro.
The above article is an extract from our regular fund manager commentaries.
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