Open-ended truce at G20

CIO Global Blog

03 Jul 2019

The outcome of the G20 meeting is a reprieve and should result in a partial lifting of the fog of uncertainty that weighed down sentiment in the lead up to the meeting. The most likely outcome is a prolonged truce on trade, with tariffs essentially on hold while talks restart, in our view. It appears that Trump will not press ahead with fresh tariffs on USD 325bn of Chinese imports, which he had threatened to impose if negotiations broke down.

Additionally, China also secured a partial easing on curbs on Huawei. Trump said that Huawei would be allowed to buy equipment from US companies where there is no national security problem. But his press conference made it clear that the company remains a key subject of negotiation and so may be used as leverage in future trade talks.

The stage is set for a resumption in US–China dialog and a period of lower trade tariff uncertainty. Both sides have incentives to engage constructively, but the gap between the demands of the US trade "hawks" and China's concessions remains. So at some future point, perhaps determined by national politics, Sino–US trade uncertainty could ramp up again. During this prospective lull in trade tensions, we believe the next major change is likely to be looser monetary policy to support China's flagging economic growth.

Asia Pacific currencies initially rose by c.0.2% on Monday, but later gave up those gains. The CNY led gains among APAC currencies, appreciating by 0.3% versus the USD to around 6.845 (from around 6.867 last Friday).

We expect the pause in the tariff escalation to drive a near-term relief rally in China A-shares and support Asia (ex-Japan) equities. We believe Asia (ex- Japan) equities' valuation is reasonable at a 1.47x price-to-book ratio, but the market is likely to remain volatile. So we still favor companies with strong cash-flows or with a track record of returning cash to shareholders through dividend payments or share buybacks.

Author:

Philip Wyatt, Economist, UBS AG; Teck Leng Tan, CFA, Analyst, UBS AG; Eva Lee, CFA, Analyst, UBS AG; Delwin Kurnia Limas, CFA, Analyst, UBS AG; Dominic Schnider, CFA, CAIA, Analyst, UBS AG