Market volatility cuts both ways, of course, with sharp swings up and down. We’ve seen no shortage of either in recent months as investor sentiment rose and fell with the slightest news of agreement or animosity in the U.S.-China trade dispute.
Global equity markets rallied on Friday’s announcement that the U.S. had agreed to suspend previously planned tariff increases on $250 billion of Chinese products. China also pledged to buy up to $50 billion of U.S. agricultural goods, among other terms. The so-called “mini” deal is the first positive sign after months of trade war escalation, but how significant is it really? Markets pulled back a bit this week as investors pondered that question.
“This is a de-escalation, so from that perspective it’s a step in a constructive direction,” says Capital Group political economist Matt Miller. “But it’s far from a resolution to the conflict. In my view, the U.S. and China will be wrangling over these issues for decades to come, and Friday’s announcement simply reflects the desire on both sides to relieve some near-term pressures.”
For the U.S. administration, the near-term pressure is the 2020 presidential election, Miller explains. And for China’s leadership, there are domestic crosscurrents at play, including China’s slowing economic growth, rising food prices and pro-democracy protests in Hong Kong.
“Both sides could use something they can call a ‘win’ right now,” Miller says. “It makes sense for a new equilibrium to be reached in the short term while the larger disagreements go unresolved. If this deal holds up — and that remains to be seen — both sides can claim victory in front of their domestic constituencies and perhaps put any longer term negotiations on a less dramatic footing.”
With the long-running trade dispute dominating headlines for the better part of two years, Capital Ideas has featured a number of investment insights on the issue.
Below, Capital Group investment professionals offer their thoughts on several key questions, including whether trade disruptions could trigger a U.S. recession, how China is reacting to the trade war on the domestic front and whether multinational corporations can overcome growing trade-related headwinds.
In a wide-ranging Q&A on the trade outlook for the U.S. economy, Capital Group economists Darrell Spence and Jared Franz note that market volatility may seem high these days, but it is just returning to historical averages. They also advance the view that the U.S. economy can handle a limited trade war, as long as there is no further escalation. If higher tariffs are eventually imposed by the U.S. and China retaliates, the risk of a recession rises substantially.
“It’s hard to know where the tipping point lies,” Spence says.
From the other side of the world, Hong Kong-based portfolio manager Steve Watson shares his thoughts on how Chinese consumers are living with the trade war. While China’s economy is slowing, the nation’s growing middle class continues to drive a powerful transition from a manufacturing and export-led economy toward a more balanced economy spearheaded by domestic consumer spending.
“When you observe China from L.A. or New York, it’s easy to imagine a country that is hunkered down, suffering from a prolonged trade war, but it certainly doesn’t feel that way in person,” Watson explains. “Life goes on and business keeps moving forward.”
Multinational companies are at the epicenter of the trade war, but as portfolio manager Jody Jonsson argues, well-managed multinationals are also well positioned to navigate a difficult environment and come out stronger on the other side.
Smart companies will figure it out, she says. Their seasoned management teams have seen all types of trade environments — favorable and unfavorable — and they have the expertise, the resources and the sheer muscle to survive and even thrive in a trade war.
“For investors, I think it’s very important to avoid focusing too much on the noise surrounding trade and protectionism,” Jonsson says. “To the extent that these trade conflicts cause investors to shy away from multinational companies, paying too much attention to the rhetoric is a detriment to successful, long-term investing.”
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