South China Morning Post
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China’s Vice-Premier Liu He shakes hands with US Treasury Secretary Steven Mnuchin as People’s Bank of China Governor Yi Gang and US Trade Representative Robert Lighthizer pose in Beijing on March 29, as the two countries’ top negotiators began a fresh round of trade talks. Photo: AFP
Opinion
Macroscope
by David Brown
Macroscope
by David Brown

US-China trade talks could seal the deal for investors looking for reasons to be optimists

  • After months of depressing data, good news out of China and the US has investors reconsidering their hesitance about stocks. Successful trade talks could lay remaining doubts to rest
David Brown
David Brown
Why you can trust SCMP

It’s the biggest challenge facing global investors on the cusp of a breakthrough to new stock market highs. Who do they believe: the growth optimists who think the world is about to stage a new phase of economic resurrection or the pessimists warning that the global economy is grinding into another slowdown? It’s the battle between risk-on and risk-off, leaving investors caught in the crossfire.

Expectations are riding high, with economic signals remain extremely mixed. Global policymakers are erring on the side of caution. The US, China, Europe and Japan have been showing clear signs of losing momentum, forcing a change of tack from policymakers to stem the tide. Hopefully it will be enough to hold the line.
The US Federal Reserve has put tightening on hold, Beijing is stepping up efforts to boost recovery, the European Central Bank says it could renew its stimulus efforts, while the Bank of Japan is under pressure to ease yet again. It’s a reflection of a global economy which has become overdependent on perpetually cheap and easy credit, creating a central bank dilemma which could last for decades.
On the bright side, there are glimmers of hope that a global hard landing can be thwarted. US data is confounding speculation that the US is slipping towards recession. March brought the best retail sales data in a year-and-a-half while the US labour market stands at its strongest level for half a century. US treasury yield curve flattening has persistently hinted at harder times ahead, but the odds are the signals are misleading. The US economy seems to be doing much better than OK.
Meanwhile China’s economy has been doing better than expected, with the first-quarter growth numbers coming through at 6.4 per cent, higher than the 6.3 per cent anticipated by market forecasts, raising hopes that the economy might be stabilising. It’s too early to say recovery has turned the corner but it’s a sign that stimulus efforts are beginning to have a positive effect.
Stock market expectations are clearly riding high, with the MSCI World equity index currently at 2,160 and homing in on last year’s 2,248 all-time peak, despite more challenging fundamentals implied by gloomy-looking global leading indicators. Hopes that US-China trade frictions and US interest rate tightening could both soon be over have been at the root of the rally. But more progress is needed on both fronts for the stock market optimism to extend.

If Beijing and Washington can sink their differences over trade it may just be the tipping point for the rest of the global economy and for financial markets. Trade flows will take time to recover but the boost to global economic confidence should go a long way in convincing investors that sticking to stocks is the best place to be. If the next move in US interest rates is down, then it could be the trigger for unalloyed stock market joy. Markets are primed, ready and waiting for better news.

Global investors are stuck between a rock and a hard place right now: cautious about the risks of slower growth but also driven by a fear of missing out on the rally. The bull market for global stocks has come a long way and may be testing the bounds of relative value. The odds are investors are underweight equities and potentially at risk of a “short squeeze”.

Global markets are sleepwalking toward a cliff’s edge. Here’s why

The latest Reuters asset allocation survey shows global funds recently raised their stock weighting and cut their cash buffer as a mark of increased optimism but remain relatively underexposed on risk overall. At the end of March, equity portfolio shares rose to 47.6 per cent from 45.9 per cent in the previous month, but still below the 49.4 per cent average over the last 10 years.

A little good news could go a long way. If the US and China are shrewd enough, between them they can clinch recovery with a trade compromise that convinces investors that the future remains bright.

David Brown is chief executive of New View Economics

This article appeared in the South China Morning Post print edition as: US-China trade deal could prove market pessimists wrong
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