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US and China shrug off trade worries

Graham Smith

Graham Smith - Market Commentator

Rewind to the start of this year and the trade tariffs being placed on goods traded between the US and China figured high among the reasons to be cautious about stock markets. Few, if any of us, thought the world could emerge unscathed if its two largest economies stayed pitted against each other for any length of time.

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So it has proven. Growth in global trade skidded to just 1% in the first half of this year – that’s the slowest pace of growth we’ve seen over a six month period since 2012¹. 

In the US, farmers and manufacturers have been hit hard, and fragile business confidence has been a persistent feature over recent months. A survey of US companies conducted in late October revealed a near-stalling of new orders².

China has suffered too, with exports about 3.2% lower in September than during the same month last year. While some of this may have been down to Chinese companies rushing to beat a deadline for yet more US tariff hikes on 1 September, exports were down in August too³.   

So why, we might well ask, are the stock markets in the eye of the trade storm giving all the appearance of a casual acceptance of this new status quo? 

Many of the companies listed on stock markets sell their products worldwide and use global supply chains to manufacture their goods. Yet the Dow Jones Industrial Average forged on to a new record high this week, while China’s markets in Shanghai and Shenzhen continued to build on already impressive year-to-date gains⁴. 

There are a few possible reasons for this apparently nonchalant attitude. First, markets are discounting an end to the trade dispute based on the shared interests both sides have in reaching a new deal. This week saw continuing optimism that Washington and Beijing may reach an accord around a so-called “phase one” deal, if not this month, then in December⁵.

Second, policymakers in both the US and China have been acting to offset the effects of trade tariffs on growth. There are some signs this has been working. 

In the US, three interest rate cuts since July have, no doubt, helped to maintain consumer confidence at buoyant levels. With an election year just round the corner, few expect the government to turn down opportunities to engineer some sort of economic lift.

In China, levers including relaxing the amount banks have to set aside against the loans they make continue to be used in order to steer the economy to a stable place. This week, a largely symbolic – but for all that, important – small cut in a key interest rate by China’s central bank signalled attentiveness to the challenge⁶.

It’s worth remembering too that China has, for several years, been working to increase its economic dependence on domestic, consumer-led growth. China’s exports are no longer the growth engine they once were.   

Another reason could be just a purely technical one – that investors starved of income returns from cash and government bonds have become more than usually amenable to accepting the risks involved in stock markets.

Whatever the real driver – it could be a combination of all of the above – places where there are risks have also been the places to find returns. So where next?

Recent optimism makes it less likely that even concrete progress towards a trade deal alone will perpetuate the strong rallies we have seen lately. Even if a partial deal is reached this month, there are likely to be many issues between the two sides left outstanding. 

More likely markets will be forced to face economic realities in the months that lie ahead. With growth slowing worldwide, that could be a sobering experience. Against that, it seems implausible the US government will let the economy slide without a fight in an election year. A robust US consumer, corporate earnings that are still growing and the delayed effects of interest rate cuts are all still reasons to remain positive.

What springs to mind from all of this is that markets have a habit of delivering the unexpected, including sizeable rallies in the face of apparent danger. Investment success over the long term requires participation when markets are performing well, to make up for losses during more challenging times and still come out on top.

Another factor is that unpredictability underlines the need for diversification. The US and Chinese stock markets are not alone in having delivered surprising returns this year. Despite the very low yields on offer at the start of this year, government bonds have produced decent returns over the past ten months⁷.

Multi-asset funds like the Fidelity Select 50 Balanced Fund can be a good place to start for investors aiming to participate in the long term returns offered by global markets via a highly diversified portfolio of equity and bond funds. Funds chosen for inclusion are predominantly taken from Fidelity’s Select 50 list of favourite funds.

Source:

¹ IMF, 15.10.19
² Markit Economics, 24.10.19
³ Reuters, 14.10.19
⁴ CNBC and Bloomberg, 06.11.19 
⁵ CNBC, 06.11.19
⁶ Reuters, 05.11.19
⁷ Bloomberg, 06.11.19

Important information 

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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