The winding road to Muscatine
In 1985 a young President Xi stayed in Muscatine, Iowa as part of a Chinese agricultural delegation. Fast-forward to today, and the rise in stocks over the past month suggests that many investors would like to see Presidents Trump and Xi meet, in a freezing field near Muscatine, Iowa posing for the world’s media with a giant USD 40bn check made out for tons of US soybeans.
Trade prospects have improved
We are skeptical about this particular image becoming a reality. Even the trade negotiators do not know at this point whether President Donald Trump will go ahead with his 15 December tariff escalation, and trade advisor Peter Navarro has poured cold water on the current state of the talks. Yet, in the past month, there have been material signs that a deal is more likely. In our view, the factors below make a complete breakdown in talks less likely and a “rollback” in tariffs more probable:
Additionally, policy and fundamentals have become more supportive
We have long maintained that, despite weakening economic data, central bank support would prevent a recession. Yet, after strong equity market performance this year, a re-escalation of trade tensions in August, and slowing growth, we felt that the best way to take risk was to emphasize earning yield rather than counting on further equity appreciation.
Now we see upside/downside risk is in a slightly better balance: 1) the US-China trade negotiations have made some progress; 2) central bank accommodation has increased; 3) corporate earnings expectations have fallen; and 4) there are tentative signs of economic stabilization. Despite higher prices and the downside risks in evidence, upside has also increased, in our view. We have closed our underweight position in emerging market equities, and have now adopted a neutral stance overall on equities.
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