Are China-U.S. trade ten­sions an­other buy­ing op­por­tu­nity?

Chi­nese eq­ui­ties could be in­vest­ing boon after tum­ble in mar­kets, ob­servers say

The Sudbury Star - - FP - VIC­TOR FER­REIRA Fi­nan­cial Post

Trade ten­sions be­tween the U.S. and China sent mar­kets into a down­turn again this week, but in­stead of pan­ick­ing, some in­vestors are con­vinced that the chaos is cre­at­ing a buy­ing op­por­tu­nity.

On Sun­day, U.S. Pres­i­dent Don­ald Trump promised to in­crease tar­iffs on $200 bil­lion of Chi­nese goods to 25 per cent from 10 per cent if a deal wasn’t reached by Fri­day. The U.S. pres­i­dent also threat­ened to levy an ad­di­tional 25-per-cent tar­iff on $325 bil­lion in Chi­nese goods.

Trump’s tweets came as a sur­prise to econ­o­mists, strate­gists and in­vestors alike who be­lieved the U.S. and China were gear­ing up to reach an agree­ment and im­me­di­ately sent the mar­kets tum­bling. While the Dow Jones In­dus­trial Average has only lost 2.5 per cent, China’s Shang­hai Com­pos­ite In­dex and the Shen­zhen Com­pos­ite In­dex have lost 7.4 and 8.2 per cent re­spec­tively since the be­gin­ning of the week.

It’s those Chi­nese mar­kets that in­vestors should be watch­ing, ac­cord­ing to Stephen Innes, the head of trad­ing at SPI As­set Man­age­ment.

“Keeping an eye on China here is im­por­tant,” Innes said. “With the as­sump­tion that the (trade) deal is not go­ing to com­pletely tank, I think buy­ing the dip is favourable.”

In­vestors have seen this sit­u­a­tion be­fore.

When Trump in­fa­mously tweeted in De­cem­ber that he was “Tar­iff Man,” the Dow plunged 799 points that very day. The U.S. mar­kets would con­tinue to slide un­til they bot­tomed out on Dec. 24.

Since then, they’ve ral­lied 20 per cent, mean­ing that most in­vestors who bought in around this time, and waited pa­tiently for a rally, were treated to hand­some re­wards.

Innes im­ple­mented the same strat­egy on Mon­day when he in­vested 70 per cent of his funds in China’s A shares. The re­main­ing 30 per cent will be held in cash for now as Innes awaits a fur­ther de­cline.

Of course, the key to his strat­egy is as­sum­ing a trade deal will even­tu­ally be reached and that a rally will fol­low to wipe out the losses the mar­ket has ac­cu­mu­lated.

“I can’t see these two mon­ster economies hav­ing a com­plete break­down know­ing the end re­sult is go­ing to be dev­as­tat­ing for both economies and the rest of the globe,” Innes said.

On Thurs­day, a Chi­nese trade envoy ar­rived in the U.S. and the two par­ties be­gan ne­go­ti­a­tions ahead Trump’s mid­night tar­iff dead­line.

The fact that China still agreed to send an envoy de­spite the in­creased ten­sions is a sign for fur­ther op­ti­mism that a deal will be reached, said Michael Arone, chief in­vest­ment strate­gist at State Street Global Ad­vi­sors.

Arone said that Chi­nese eq­ui­ties would make a strong en­try point for some in­vestors, es­pe­cially those with high cash po­si­tions who found them­selves on the side­lines due to the volatil­ity at the end of 2018. China’s tech­nol­ogy sec­tor could re­ward in­vestors, given that com­pa­nies like Alibaba and Weibo were not im­mune to the dip, he said.

Out­side of tak­ing ad­van­tage of a po­ten­tial rally, the fun­da­men­tals would also sup­port an in­vest­ment there, ac­cord­ing to Vi­nay Pande, head of trad­ing strate­gies at UBS Global Wealth Man­age­ment.

Pande is still sug­gest­ing that his clients re­main over­weight on emerg­ing mar­kets through the ne­go­ti­a­tions as a way of tak­ing ad­van­tage of the stim­u­lus that China is pump­ing into its econ­omy.

Un­like in 2018, when emerg­ing mar­kets were rocked and China en­tered a bear mar­ket, the pro­jected earn­ings growth in emerg­ing mar­kets is 1.5-per­cent­age points greater than in the U.S. China’s earn­ings per share ex­pec­ta­tions alone are more than dou­ble those in the U.S and yet val­u­a­tions re­main skewed, he said.

“There is nev­er­the­less a great dif­fer­ence in val­u­a­tion be­tween the U.S. mar­kets and (emerg­ing mar­kets) and what we’re say­ing is if you’re get­ting the same earn­ings stream, you have to ask your­self if the risk in that for­eign mar­ket is so large is jus­ti­fies the ex­treme dif­fer­ence in val­u­a­tion,” Pande said.

With the as­sump­tion that the (trade) deal is not go­ing to com­pletely tank, I think buy­ing the dip is favourable.

NG HAN GUAN/THE ASSOCIATED PRESS

A worker is seen near the China Zun sky­scraper un­der con­struc­tion in down­town Beijing on Thurs­day. In­vestors could ben­e­fit if a trade deal is reached be­tween China and the U.S. and if a rally will fol­low to wipe out the losses the mar­ket has ac­cu­mu­lated.

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