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Despite the US-China trade war deal, investors should brace for a widening chasm between the two countries
- The US and China are likely to adopt divergent economic approaches and different attitudes to international engagement
- Investors should also anticipate stricter regulations of US tech companies, a clampdown that is unlikely in China
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The US-China phase one trade truce has been largely welcomed by markets and it has been interesting to see estimates of economic and corporate earnings growth being marked up as a result. However, with the recent outbreak of the coronavirus weighing heavily on markets, investors perhaps haven’t had the opportunity to reflect on the wider implications on the deal.
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Even if we put to one side the fact the deal lacks detail and is far from comprehensive, the last few quarters offer evidence that the impact of tariffs on overall economic activity has been more modest than was initially feared, with fiscal and monetary stimulus in both countries being stepped up in 2019.
It stands to reason, then, that investors should be cautious about the extent to which this trade war development will influence overall growth prospects for 2020.
It is also worth asking what the deal signals in terms of direction for the rest of the year. While attention is on the near-term effects of the coronavirus right now, the US-China relationship will have much longer-lasting effects. Investors should be prepared not for greater convergence but for a growing chasm between the US and China over the course of the year, with consequences for allocations and returns.
First, US and Chinese economic policy may increasingly diverge. The US and broader asset markets were buoyed in 2019 by the US Federal Reserve reversing its prior path of tightening monetary policy, driven by concerns about liquidity in funding markets, some soft economic data and, most significantly, substantial and vocal political pressure.
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