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Donald Trump and Xi Jinping to seal a deal? A very slim chance, say traders

A common view among China investors: there's little chance the two leaders will suddenly reach an agreement and resolve a trade dispute


US china trade war
Illustration by Ajay Mohanty

Fund managers are sticking to their positions ahead of this week’s meeting between presidents and Xi Jinping, saying they don’t expect much progress to be made.

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

“We’re waiting for things to get worse on a much larger scale before buying the dip” - Brian Chen

“Our position is to take a wait and see approach” - Daniel Gerard

Trump caught some people off guard last week when he tweeted that he was optimistic about the meeting with China’s president, with traders rushing to bet on a stronger, more volatile yuan. The Chinese currency ended with its biggest weekly gain since February, while the Shanghai Composite Index climbed to the highest in nearly two months.

Then over the weekend the U.S. 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.”

Stock Picks

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% cash level, which would be a risk-off scenario,” Tsui said. “Right now over 90% of our stock positions are firms relying on domestic demand to drive earnings.”

The Shanghai Composite Index is up 21% in 2019 thanks to a strong start to the year, though it’s now down 8% from an April high.

Worst Over?

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.”

Yuan Direction

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% to 6.8761 per dollar on Monday after strengthening 0.9% 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 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.

Deal Time?

Caution still pervades given the uncertainty over the timing of any deal.

“We don’t have a 100% 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% since March, said certain buying opportunities will only emerge when the slowing economies of China and the U.S. cause a global debt crisis. “We are waiting for things to get worse on a much larger scale before buying the dip,” he said.

First Published: Tue, June 25 2019. 07:32 IST