Vasu Menon: Look to 2018 US-China Trade War for Clues
Could this mark a permanent de-escalation in the US-China trade war? OCBC’s Vasu Menon suggests a review of the last bout in 2018 for hints.
In a positive surprise, the US and China stunned markets by reaching a trade deal after just several days of talks in Switzerland. Under the new agreement, the US will effectively lower tariffs against Chinese goods to 30 percent while China will lower its tariffs to 10 percent.
Now, the focus is quickly turning to how sustainable this calm is and whether there is more upside or downside ahead. According to a note authored by Vasu Menon, managing director, investment strategy, OCBC, there are some similarities between the previous US-China trade war that began in 2018.
Play-by-Play Review
In 2018, Donald Trump’s trade war kicked off in July before a dinner in December the same year with Chinese President Xi Jinping led to a 90-day delay in the imposition of tariffs. A trade deal was subsequently signed in January 2020.
«We are seeing somewhat of a replay of this scenario in the latest trade agreement between the US and China,» Menon said.
Key Differences
However, Menon highlights that there are several differences between the two trade wars. First, Trump’s tariffs this tie involve more countries and possibly more sectors. Second, Trump had floated an 80 percent tariff on China before negotiations started on May 10, which could weigh on investors' minds due to his «penchant for surprising markets».
«A significant slowdown in the US economy seems almost certain but a recession remains an uncertainty, although we do not anticipate a US recession at this juncture. For now, we see US economic growth slowing down sharply from last year’s 2.8 percent to 1.4 percent this year,» Menon added.
What Should Investors Do?
Meanwhile, OCBC is positive on the outlook for a 12-month horizon with an overweight position on equities, especially in Europe and Asia ex-Japan. Within fixed income, it emphasizes credit quality from investment grade bonds with a focus on short-term (1 to 3 years) and medium-term (3 to 7 years) maturities as they are less susceptible to rates volatility. The bank is also positive on gold with a 12-month target of $3,900 per ounce.
«Recent developments on the trade-war front have given good reasons for greater optimism. However, investors should not let their guards down completely, throw caution to the wind, and assume that blue skies have returned,» Menon remarked. «Trump’s trade policies remain an uncertainty as his planned tariffs have been paused, but the final outcomes remain unclear.»
