1. US-China deal not an end, but a beginning.
Stocks have been rising since the US-China Phase 1 trade agreement was announced, and on 15 January both parties signed the deal. China plans to increase purchases of US goods and services by about USD 200bn over two years, while the US will roll back tariff increases in phases. It's important for investors to understand the limitations of the deal. First, this does not mark the end of tariffs; the US will keep them in place on USD 370bn worth of Chinese goods, pending the conclusion of a second phase of the trade deal. Second, a revival in business investment is likely to be modest given the partial nature of the agreement, meaning further flare-ups in tensions can’t be ruled out. And third, supply chains that were already disrupted look unlikely to return to prior patterns. We have seen a rerouting of supply chains for about half of the Chinese goods affected by tariffs to other nations including Vietnam and Malaysia. That said, we think the agreement should be sufficient to mitigate downside risks to the economy and should help underpin a positive outlook for risk assets.
Takeaway: The deal does not represent an end to trade tensions, but it does help mitigate economic downside risks and should underpin the stock market rally. In our view emerging market stocks are best placed to thrive in this environment. Read more here.
2. Still upside as earnings season kicks off.
The S&P 500 has reached a record high as geopolitical tensions have eased leading up to the signing of the Phase 1 trade deal. Now some of the focus has shifted back to the fundamentals, with the start of the 4Q earnings season. We think there is scope for earnings growth to drive some further upside in stocks. We expect earnings growth of 6% for the S&P 500 this year. And leading indicators of earnings growth look favorable, with access to capital still supportive according to the Fed’s Senior Loan Officer Opinion Survey. Overall, we doubt last year’s weakness in earnings will be repeated this year, particularly given that weaker segments of the market (such as semiconductors) are poised to improve as trade tensions subside. That said, with the forward price-to-earnings ratio of the S&P 500 at 18.6x, well above the 20-year average of 15.8x, investors should remain well diversified and selective.
Takeaway: We think there is still upside for stocks. For investors afraid to deploy capital into equities all at once, we recommend considering a phase-in strategy with three key elements: committing to a set schedule (aiming for deployment within 12 months, with a plan to accelerate if there is a 5% or 10% selloff); investing in bonds first and riskier assets later; and employing put-writing strategy to provide some return if a dip-buying opportunity doesn't arise.
3. Winning in a Decade of (Digital) Transformation.
Taiwan’s government last week awarded 5G licenses in an auction that drew USD 4.6bn, a global record relative to the size of the country's population. The latest airwaves auction demonstrates the potential businesses see for rapid growth in digital services. The ability of 5G to transmit large amounts of data wirelessly will open doors for a vast array of new applications, ranging from autonomous driving to remote surgery. To benefit from the upcoming wave of digital transformation, we advise diversified investing focused on six key themes: digital data, as we expect the data universe to grow more than tenfold over 2020–30; e-commerce, where we think revenues should grow 15%–20% annually over the next ten years; enabling technologies (including AI, AR/VR, big data, cloud, and 5G), offering a combined growth of around 12% annually by 2025; fintech, whose revenues should grow around three times faster than the broader financial sector’s into 2030; healthtech, which will be driven by increased healthcare spending by an aging population; and finally security and safety, where we forecast mid-to-high single-digit growth over the next 5-10 years.
Takeaway: We believe digital transformation will redefine business models. Since technology firms are subject to the usual business cycle risks, we recommend gaining exposure to a broad group of companies in the digital transformation space. More here.
1. How long will central banks stay on hold?
The Bank of Japan and the European Central Bank will announce their rate decisions this week. We expect a continuation of accommodative policy, which favors debtors over savers. In this environment, investors should consider whether borrowing could help them achieve their broader financial goals.
2. Will the impeachment trial create market tension?
Two articles of impeachment were sent to the Senate last week, and the trial will start this week. We expect US President Donald Trump to be acquitted and think market reaction will be muted. Looking ahead, regulatory concerns could drive short-term volatility ahead of the US election in November, particularly in the technology, healthcare, and energy sectors, so investors could be better off investing in companies with exposure to longer-term trends such as digital transformation, genetic therapies, and renewable energy.
3. Can sterling bounce back?
The British pound has dropped 2% versus the US dollar since the start of the year to 1.30, and weak growth and inflation data are leading investors to consider the possibility of a rate cut by the Bank of England. Still, the pound remains undervalued, and the extent of its undervaluation has increased since the Brexit referendum.