China, HK markets will be less skittish as trade war drags on, observers say

14-May-2019 Intellasia | South China Morning Post | 6:00 AM Print This Post

China’s response to the imposition of increased tariffs by the Trump Administration suggests that a protracted trade war lies ahead, but investors’ sensitivity to escalations and de-escalations could wane over time, according to observers.

People’s Daily, the Communist Party of China’s official newspaper, said in a Sunday editorial Beijing will not “bow to any brinkmanship” and “will not back down on principle issues”. Global Times, a nationalist newspaper affiliated with People’s Daily, said the US had “seriously underestimated China’s capacity to endure”.

“The US shouldn’t hold the unrealistic fantasy that it holds more bargaining chips with its new tariffs. China’s confidence and core concerns will by no means be weakened by a little tariff increase,” Global Times said.

These comments echoed those made by top Chinese trade war negotiator, vice-Premier Liu He, who after his US visit on Saturday, on one hand, reassured the markets with his measured optimism about reaching a deal, while on the other, emphasized that China will not back down on its principles.

These developments show that while both sides have failed to gain meaningful ground on key sticking points, they have felt the need to manage market expectations and continue the talks.

For the market, it means having to adjust to the “norm of escalation and de-escalation” in the coming months, according to Morgan Stanley.

“Our base case is a re-escalation would be temporary, as market weakness would help bring both sides back together,” said Michael Zezas, US public policy strategist at Morgan Stanley. “And when accessing the global impact, don’t get lost in the analysis of direct impact. The impact on corporate confidence and capex outweighs the direct impact.”

Stuart Canning, an analyst with M&G Investments, said compared with a year ago, when the sudden rise of trade tensions caught strong markets off guard, now the markets have absorbed the trade war as a long-term risk.

“We have now had over a year to consider the likely impacts of trade war measures, and though the new developments could present a shift in the extent of these risks, they are not the unknown that they once were,” he said.

Chinese investors too largely hold similar views. WellSpring Capital, a private-equity fund in China, said in a recent research note a likely scenario was no breakthrough in trade talks in two to three months, but the expectation of more easing and stabilising economic data suggest a slow bull in the period through end July.

“The talks will be in an ‘on-and-off mode’, but over time the market has become used to this environment, and will respond more mildly to bad news,” it said.

The trajectory of last week’s stock markets offers an example. Markets in mainland China and Hong Kong were initially hit hard by US President Donald Trump’s sudden threat of tariff increases, and panic equity sales drove the Shanghai Composite Index and the Hang Sang Index to record lows. But the markets recovered some of the losses by Friday, as they adjusted to the new norm.

Zhen Wei, MSCI’s head of China research, said fear surrounding the trade war was not the only factor that affected the markets, while the declines may present wise investors with an opportunity to buy at low prices.

He gave the example of a rally in Chinese equities earlier this year, which cannot be explained by the trade war. He said global equity investors might have been seeking relative value after A shares declined by 29.3 per cent in the last three quarters of 2018, and their average price-to-book ratio fell to a multi-year low.


Category: Hong Kong

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