More China and US Drama
This week, China set the price of their currency to the US dollar at 7.0136 per dollar (above 7) which has not occurred in many years. A weak currency makes Chinese goods cheaper for purchasers outside of China and the United States deems this to be a practice that is unfair competition with US companies. For that reason, the United States (for the first time in 10 years) has labeled China a currency manipulator country.
At the end of this month, new talks are scheduled to focus on restarting dialogue rather than maintaining the current animosity that is expressed in press conferences and Twitter feeds. The goal is to come to an agreement to allow both countries to declare some sort of victory. We expect this will happen but are increasingly concerned that the drama will drag out longer than many had expected. For that reason, we expect more volatility based on international headlines.
There already has been a significant impact in US China trade relations in terms of total dollars in trade. As you can see from the chart below, trade has been impacted by the dispute.
Source: The Impact of US – China Trade Tensions as reported by IMF Blog on May 23, 2019 by Eugenio Cerutti, Gita Gopinath, and Adil Mohammad, available at https://blogs.imf.org/2019/05/23/the-impact-of-us-china-trade-tensions/
This trade dispute is not just about trade deficits. An important concern for the United States is that protection of intellectual property is assured. The concern remains that China will take advantage of trade with US companies as a way to gain a competitive edge based on learning trade secrets from United States companies. This is a sticking point in negotiations and one that will not be easily resolved.
It is our view that there will be a trade agreement, but that it will be just a superficial step towards additional dialogue. The problems are too deep to be resolved in a matter of weeks or months. It’s going to take time and I’m quite convinced the Chinese are comfortable in taking the long view in addressing these issues.
We are cautious about international equities. In particular, emerging markets (EM) have been a concern for us. This has turned out to be an appropriate concern. We will continue to monitor conditions and make adjustments as necessary.
At some point the value of EM will become compelling enough for us to be tempted to invest more in the emerging market space. For now, we are comfortable investing in US equities and fixed income positions as our primary focus.