The pattern of US-China trade talks has been predictable, but markets’ reaction may not be

History seems to repeat itself, with a de-escalation before trade tensions inevitably flare up over unresolved issues. Investors, however, should avoid assuming that familiar government steps will lead to similar reactions in the market

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Donald Trump has sung the praises of the “deal” the US and China have struck, but nothing has been signed as of yet and the two countries remain far apart on crucial issues. Photo: AFP

Published: 9:00pm, 18 Oct 2019Updated: 10:31pm, 18 Oct 2019

History has a tendency to repeat itself. This is what makes formulating successful investment strategies possible, at least most of the time.

But the expectation that historical patterns will re-emerge can be a trap for those not looking at the whole picture. A rising sense of déjà vu can lull people into a false sense of security, without recognising that this time may be different enough to yield an alternative outcome. Markets may be beginning to follow that pattern when it comes to US-China trade issues.

The prevailing sense of déjà vu arises from a familiar cycle of escalatory rhetoric, followed by announced progress from negotiations, only to see rumoured deals fall apart and more trade restrictions enacted. Following a seemingly promising de-escalation of tensions in early July, I wrote the following in the Post:

“Those who aren’t paying close attention may have seen the positive headlines and assumed they could shift their focus to other dynamics [like US Federal Reserve policy] when making investment decisions for the rest of the year, when that is unlikely to work in their favour.

“... We saw almost exactly the same rise in rhetoric, followed by a smiling handshake and the postponement of further restrictions, at the G20 on December 1, only for tensions to rise again when negotiations did not progress fast enough. This pattern could repeat itself.”

Déjà vu is a powerful force in capital markets. When investors feel they have seen this playbook before, they tend to act according to what would have delivered the best returns last time. That’s not necessarily a bad strategy, but it does raise the risk of ignoring new information.