Expectations Are Too High for China Trade Deal
Author: Greg Valliere
March 14, 2019
MOST ANALYSTS BELIEVE A CHINA TRADE DEAL is fully priced into the markets, which can mean only one thing — if there’s a wild card lurking, it would be the emergence of a negative surprise. While we expect a signing ceremony by later in the spring, the idea that a final pact can be completed by the end of this month is optimistic, to say the least.
CONFUSION INCREASED yesterday as President Trump proclaimed that he’s “in no rush” to finalize a deal, a tip-off that he’s lowering expectations. There are numerous sticking points — including intellectual property rights, the dominance of Chinese state-owned monopolies, and the most vexing issue of all: establishment of a credible enforcement mechanism.
BOTH SIDES NEED A DEAL: Former Trump adviser Gary Cohn said yesterday that the president is “desperate” for a deal for political reasons; we agree. And the Chinese reported dismal industrial output data last night, which probably will require more economic stimulus from Beijing, where fear of a slowdown persists.
WE THINK THE CHINESE WILL HOLD OUT on signing a deal until one is completely finished. Trump said yesterday that he would prefer a signing ceremony and then completion of the final details, but that seems like a non-starter for the Chinese, who surely recall the debacle when Trump and Kim Jong-un arrived at their summit with nothing finalized.
THUS WE THINK there’s a less than 50% chance of a Mar-a-Lago summit at the end of this month after Chinese President Xi finishes a trip to Europe, where he will get an earful; anti-Trump sentiment is viral there. Xi is highly unlikely to arrive in Florida unless a deal is 100% complete — and a deal most definitely is not close to completion now.
THE POSITIVES: Chances of a deepening and persistent trade war have diminished greatly; there’s a high likelihood of a deal this spring that will reduce tariffs and open Chinese markets, a plus for both countries. The resulting GDP rise may be relatively modest, but that’s not the point — the deal will reduce the risk of lower GDP and business uncertainty.
OUR ADVICE IS TO IGNORE, if possible, the confusing rhetoric from Trump and his advisers. He’s a master at creating suspense; like a reality TV show host, Trump knows how to boost ratings. So one day a deal may look finished; the next day the talks may seem stalled. In any event, be prepared for a delay — there’s probably not enough time to resolve all the outstanding issues in the next two weeks.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2019 AGF Management Limited. All rights reserved.