Chinese stocks rally as Trump announces a delay on further China tariffs

President Trump announced via twitter on Sunday that the United States will be delaying an increase in tariffs on Chinese goods scheduled for 1st March. Trump reported that substantial progress has been made in the trade talks with China on several important issues, with investors now anticipating pragmatism will prevail and a longer term agreement between the two nations will be reached.

The dispute regarding trade between the world’s two largest economies intensified during 2018, prompting volatility in stock markets around the globe. The US and China together account for more than a third of the global economy, and as a result the struggle to reach an agreement on trade is naturally having an impact on markets worldwide.

The importance of international trade on economic growth is much more significant for China and other Asian countries than it is for the US, with exports accounting for almost 20% of total economic output in China. For the US, the figure is almost half of that. China’s economy has been slowing in recent years, but the impact of trade disagreements prompted a further slowdown last year. It is perhaps unsurprising then that China’s stock market fared worse than the US market during 2018, with the S&P 500 index falling by 7.7% across the 12 months vs a 25.5% fall in the Shanghai Composite index.

The US was due to hike tariffs on $200 billion of Chinese goods to 25% from the current level of 10% from 1st March, if they were unable to reach an agreement with Beijing officials before then. The news which broke over the weekend confirming these tariffs would not be implemented in March provided a welcome boost to stock markets. Shanghai’s Composite index posted a 5.6% gain on Monday, with the S&P 500 opening 0.5% higher than Friday’s closing level.

The rally yesterday has built on the strong start to 2019 seen in global stock markets, with last month being the best January for global equities since 1987. Aside from other key data regarding the global economy, the diminishing likelihood of the US proceeding with the increase in tariffs in March has contributed to stock markets ticking upwards in recent weeks, with China’s stock market being one of the main benefactors. The Shanghai Composite Index has risen by nearly 20% in the year to date.

As part of the latest changes we made to our portfolios in December, we chose to increase exposure to China and Asia, reducing our allocation to the US at the same time. Despite the impact of the trade dispute, we felt that Chinese equities appeared to offer much better value than their US counterparts, in addition to trading at a significant discount relative to their own history. So far during 2019, this decision appears to have been the correct approach, with international flows into Chinese equities increasing as sentiment towards China and other emerging markets improves. In addition, policymakers in Beijing are expected to implement further fiscal stimulus in an attempt to reduce the rate at which the Chinese economy slows. Consequently, we feel there is a strong case for Chinese equities performing well during the remainder of 2019 and the outperformance of the Chinese stock market so far this year supports our decision at the end of 2018 to increase exposure to the region.

As always, we will assess this ongoing, keeping a close eye on US-China trade talks, as well as monitoring the impact for investors of slowing economic growth in China.