Don’t get too excited about the US-China agreement

mark chappel

Mark Chappel

28 January 2020

The President may be talking a big game about the ‘Phase One’ US-China trade agreement but its effects could be limited.

After a whole year of tariffs between the two countries, months of negotiations and minor steps forward here and there, President Trump is celebrating “a momentous step, one that has never been taken before with China, towards a future of fair and reciprocal trade.” For markets and investors which had suffered reduced returns due to the US-China trade war, this made for a very happy new year.

But we believe that investors’ optimism here is generally too strong. Although a deal exists, it covers only a relatively small proportion of US imports (0.1% of GDP), and it should not be forgotten that President Donald Trump is unpredictable: he retreated from the Mexico trade deal only shortly after agreeing to it.

What does this mean for investors?

The stand-off between the US and China affects a structural relationship in the global economy. The longer the uncertainty remains, the greater the erosion of trust and impact on global trade and supply lines.

Our Multi-Asset team has written about what investors should be on the lookout for this year from the US and President Trump:

  • Our indicators still suggest that the US economy is what’s known as ‘late’ in the economic cycle, which means it’s coming closer to a recession
  • The presidential election in November, which will follow the Trump impeachment proceedings, could be full of surprises depending on who wins the Democratic nomination
  • Amid fresh tensions in the Middle East, there are plenty of hazards ahead for the President and the largest economy in the world

Managing the China growth slowdown

China, meanwhile, is taking various measures to manage its slowdown in growth, rather than resorting to a more aggressive pattern of spending to try and stimulate its economy. While we’ve written about how the tariffs might not have had the negative impact on China that most investors were expecting, many recent developments belie a negative trend, including controls on the flow of people’s money and controls on technology exports.

Further to this, China’s relationship with its neighbours and particularly Hong Kong remain in focus and investors will need to keep an eye on places where further protests may emerge.

As we covered in our outlook for 2020, it really does look like this will be (another) year of change. Political volatility around the world shows no signs of letting up – so staying diversified across many types of investments can help spread your risk around and not be concentrated in one specific area.

Risk warning

Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.

Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.