US trade relations with China remain fragile, even as high-level trade talks continue. (ddp)

Long-running trade tensions have been a major preoccupation for investors. US trade relations with China remain fragile, even as high-level trade talks continue. In addition to the feud with China, the US continues to threaten higher tariffs on auto imports, which if implemented could hit Germany and Japan especially hard. While a renewed trade escalation remains a risk, there are promising signs that President Trump is willing to compromise and is not impervious to the economic impact of his trade policies. Markets are also supported by continued economic growth and rising earnings.

Trade frictions look set to persist over the coming years.

  • Even as trade negotiations continue, the rivalry between the US and China will not be easy to overcome, especially on the issues of intellectual property and technology.
  • A breakdown of talks between the two nations remains a risk, as does the imposition by the US of higher import tariffs on autos.

The damage to markets can be contained.

  • The Trump administration late last year agreed on a NAFTA replacement, and on 28 February suspended tariff increases on China imports "until further notice."
  • Another Trump-Xi summit will likely take place within the next few months, as both sides have grown increasingly supportive of reaching an agreement.
  • Equities are still supported by fundamentals, including continued economic growth and rising earnings.

This supports our risk-on stance.

  • Global economic growth, renewed policy support, and corporate earnings should continue to drive equity markets higher.
  • Although trade tensions pose a short-term risk, we think additional progress toward a trade deal could be an upside catalyst.
  • Investors should stay invested but protect their portfolios against downside risks.

New this week

Long-running US-China trade negotiations appear to be narrowing in on a deal, with US Treasury Secretary Steve Mnuchin predicting the two sides would reach a settlement that goes “way beyond” previous bilateral trade deals. Media reports suggest this may include enforcement mechanisms governing both sides. Separately, Reuters reported US negotiators have diluted demands that China curb its industrial subsidies and tax breaks for state-owned enterprises. According to US claims in WTO filings, China offers more than 500 such subsidies.

Investment view

CIO remains tactically risk-on within equities and continue to hold EM USD-denominated sovereign bonds. CIO remains overweight China in our emerging market and Asia portfolios. CIO believes China's cyclical market with solid fundamentals and cheap valuations will outperform its peers.

For more, see Could we see a US-China trade breakthrough , 17 April 2019.