Is the Truce over?

Washington and Beijing have so far failed to reach a long-sought trade deal despite intense talks these past weeks. Fears about a further escalation have shaken investors and hit stock markets.

In our opinion, investors should dismiss the idea that talks could break down, albeit uncertainties remain. We believe we are entering the final stage of negotiation, but this is probably the most difficult stage, as several major issues are open, and, on these, it is largely up to Trump and XI to make final decisions.

“Recent work has been on details and wording, while several major issues remain.”

Yerlan Syzdykov

Global Head of Emerging Markets at Amundi

 

“Recent work has been on details and wording, while several major issues remain.”

Yerlan Syzdykov
Global Head of Emerging Markets at Amundi

Attitudes on both sides, given newly increased tariff and Chinese retaliation, show scant hope to reach an agreement in the short term. Yet, both parties are leaving the door open to negotiations.

The Tariffs impact

While tariffs will hurt everyone, from Chinese exporter to US customers, interestingly, we believe that the impact on global growth and trade should be contained to a certain extent. Chinese authorities are better equipped to offset external shocks and local sentiments look less fragile. In Washington, meanwhile, the FED seems more accommodative than it was last year.

It is the countries most integrated with China in the production chain that will suffer the most, while exporting countries that compete with China could benefit, both from increasing their exports to the US and from the production relocation of certain manufacturing sectors.

Glimmer of Hope

Into the bargain, we continue to believe that China is on the right path to managing the economic slowdown through comprehensive policy interventions, even if it may take a little longer for China to hit bottom than the consensus expects (i.e. Q2 of this year).

“Our base case scenario is still of a moderate slowdown for China through policy interventions.”

Yerlan Syzdykov

Global Head of Emerging Markets at Amundi

 

“Our base case scenario is still of a moderate slowdown for China through policy interventions.”

Yerlan Syzdykov
Global Head of Emerging Markets at Amundi

Relative Value Opportunities

Challenges remain across the board and, at this juncture, we suggest investors maintain a cautious stance. Any deal is likely to be a little more than a brief truce in a longer war.

“We expect episodes of market volatility to continue and they could create potential entry points.”

Yerlan Syzdykov

Global Head of Emerging Markets at Amundi

 

“We expect episodes of market volatility to continue and they could create potential entry points.”

Yerlan Syzdykov
Global Head of Emerging Markets at Amundi

All things considered, we recommend a selective approach, among EMs and within the Chinese market: some sectors may offer better value than others as domestic demand will work as a buffer against the damage caused by the tariffs and we will continue to see strong investment from the central government. 

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