Trump and Xi to seal a deal? Traders aren't holding their breath
Caution still pervades given the uncertainty over the timing of any deal.
A common view among China investors: there’s little chance the two leaders will suddenly reach an agreement and resolve a trade dispute that has weighed on markets over the past year. Most are keeping an emphasis on domestic-focused defensive stocks, though much potential downside is already priced in, while foreign-exchange traders expect a slight weakening in the yuan.
Here are a few snippets of views on the Trump-Xi meeting:
- “Nobody is really expecting anything concrete” - Caroline Yu Maurer
- “There’s a very slim chance that we’ll get a solution to the trade issue” - Frank Tsui
- “The market has already discounted bad news for a worst-case scenario” - Claudia Calich
- “Our position is to take a wait and see approach” - Daniel Gerard
- “We’re waiting for things to get worse on a much larger scale before buying the dip” - Brian Chen
Then over the weekend the US said it was putting more Chinese technology companies on a blacklist, following a similar move on telecommunications giant Huawei Technologies Co. last month. This ebb and flow in terms of reaching a detente hasn’t helped investors shape a concrete view on where talks may go.
“It’s very difficult to decisively bet on one way or another in the market right now, given the lack of clarity on both the trade talks and the economy,” said Caroline Yu Maurer, head of Greater China equities at BNP Paribas Asset Management Ltd. “While some progress will be made at the meeting, it’s unlikely that both leaders reach an agreement and make the concern go away. So you can’t really turn bearish or bullish.”
Maurer likes consumer and health-care sectors as they are domestically-driven. Frank Tsui, a fund manager at Value Partners Hong Kong Ltd., also likes those businesses, as well as education companies. He expects the planned meeting between Xi and Trump won’t yield much progress and “doesn’t feel an urge to adjust” after shedding some tech names in the past year.
“There were occasions in the past year or so that we boosted cash positions by a few basis points, but we never went to beyond 10 per cent cash level, which would be a risk-off scenario,” Tsui said. “Right now over 90 per cent of our stock positions are firms relying on domestic demand to drive earnings.”
The Shanghai Composite Index is up 20 per cent in 2019 thanks to a strong start to the year, though it’s now down nearly 9 per cent from an April high.
The general consensus is that Chinese equities won’t come under too much pressure, whatever happens at the talks. Daniel Gerard, Asia Pacific head of investment and risk advisory at State Street Bank and Trust Co., said downward price action wasn’t too severe as the trade dispute escalated because institutional investors hadn’t piled into the emerging-market rally in the first quarter.
“While we would not advocate fully allocating back into high beta, EM equities and risk-on given the real risks to growth and the fundamental story, nothing is screaming out to us to be fully defensive either,” Gerard said. “We remain firmly neutral.”
Singapore-based Gerard said the yuan is also likely to stay in a narrow range for now, as it wouldn’t be in China’s best interests to let the currency weaken much further, while it’s also hard to see it strengthening much. Ken Cheung, senior Asian FX strategist at Mizuho Bank Ltd., said investors may trim yuan exposure before the “key risk event” of the summit. But, given built-in short positions, they may buy back the yuan against a weakening dollar.
The yuan fell 0.1 per cent to 6.8813 per dollar Tuesday after strengthening 0.9 per cent last week. The currency is near the same level as at the start of the year.
Faced with the increasingly fiery trade dispute, China has taken steps to loosen liquidity, boost lending and support its weakening economy, which should help the bond market. Jason Pang of JPMorgan Asset Management said a negative outcome to talks could push central banks in the region to cut rates. He likes Chinese government and policy bank bonds of three- and five-year tenors.
“With heightened uncertainty on the trade front, we believe that China will increasingly focus on establishing a stable domestic demand base over the longer-term to push the economy toward a gradual reduction of its reliance on export-driven growth,” added Shao-Ping Guan, head of Greater China equities at Goldman Sachs Asset Management.
Like others, Guan favors investment opportunities catering to growing domestic demand, such as health-care and insurance due to a rapidly aging population, banking needs driven by rising incomes and urbanization, and home appliances as consumers demand more sophisticated products.
Caution still pervades given the uncertainty over the timing of any deal.
“We don’t have a 100 per cent clue about what is going to be reached in the G-20 meeting, but we still believe in the medium term there will be some constructive agreement being reached, but we don’t know if its going to be within this week,” Lilian Leung, Greater China equities portfolio manager at JPMorgan Asset Management, said on Bloomberg Television on Monday.
Brian Chen, a fund manager at Shanghai Leader Capital Co., said the G-20 will have “just a small wrinkle” of an impact on markets. “We wouldn’t be surprised whatever the outcome, be it the restart of talks or that the two leaders don’t have a private meeting at all.”
Chen, who’s lowered equities exposure to just 30-40 per cent since March, said certain buying opportunities will only emerge when the slowing economies of China and the US cause a global debt crisis. “We are waiting for things to get worse on a much larger scale before buying the dip,” he said.
Rick Su, Taipei-based fund manager at Capital Investment Trust Corp.
- Started adding mainly heavyweight A shares -- Kweichow Moutai, Ping An, China Merchants Bank -- as a short-term strategy ahead of the meeting
- Negatives are mostly priced in and downside risk for A shares is limited
- Don’t see real positives from the G-20
- Stabilization in China’s economy and pickup in earnings growth could support A shares in the second half of the year
Zhongliang Tuo, Beijing-based investment manager at Cinda Securities Ltd.
- Could see easing in trade tensions, though there’s still much uncertainty and would only likely be temporary
- Keeping 60-70 per cent position in convertible bonds as a safety cushion; looking at tech company convertible bonds as well as for banks that were oversold after the Baoshang Bank takeover
Shine Gao, investment director at Taicheng Capital Management Co.
- Position for a rebound, increasing exposure to favorite banks and insurers and adding alpha through gold miners, which have been boosted by the Federal Reserve and rising prices
- Equities have gathered momentum for a rebound after a month of sideways movement
- “We’re rather optimistic on the outcome of the G-20, not that the two sides will make real progress on a deal, but things can’t get any worse and are actually thawing”
Claudia Calich, London-based fund manager at M&G Ltd.
- Most bearish outcome could lead to emerging currency weakness and widening of bond spreads, while a positive result would lead to a relief rally in EM currencies and spread tightening
- The market might also “price out” some of the expectations for a rate cut and US Treasury yields may rise
- Sold Chinese corporate bond holdings a few months ago and put proceeds into other EM assets like Sub-Saharan Africa and Eastern Europe
- Market has already discounted bad news for a worst-case scenario, so bonds are unlikely to see further near-term weakness on a neutral outcome
Tuan Huynh, APAC chief investment officer at Deutsche Bank Wealth Management.
- Chinese stocks could see downside pressure in the near term, mainly because of the continual trade tensions, declining corporate profits and relatively high valuations
- Chinese stocks could get some temporary support if any positive breakthrough in talks
- Favor Chinese bonds over equities, especially high yield, which remains attractive due to resilient credit fundamentals, the Fed’s easing monetary policies, and likely more expansionary fiscal/monetary policy in China