There was news out last Friday that U.S. President Donald Trump has directed his cabinet to start crafting a new trade agreement with China.1 With my focus on emerging markets, this is welcome news, as the trade dispute between the world’s two largest economies has cast uncertainty over the markets.
In my opinion the trade war is not a short-term issue, but there are a few things I am watching that may unfold within a short time-frame.
First, I believe Trump will have a new strategy now that the U.S. mid-term elections are over. From China’s perspective, I think they know they must come to the table and make some compromises. So I think both sides are considering a new game plan.
China seems to recognize that it may benefit from a softer line, rather than pushing its past agenda on expanding its global influence. That certainly offended the U.S., so China may consider toning down its ambition.
I think that the Chinese government may take a more flexible, practical approach going forward, regardless what they might say publicly, which I see as a standard negotiation tactic, really.
The trade issue will be sorted out, but this will not stop China’s growth. Regardless of the official gross domestic product report, I believe it’s more like 4.5% to 5%, on a real-return basis. Given the size of the economy, that’s still pretty good.
I think in the near-term, the negative effects of the trade dispute will probably play a major role, because U.S. tariffs reduce exports to that market. But once the economy digests that, I believe stronger companies will take advantage of their weaker competitors. In my opinion, they should be able to take market share, increase their revenues and grow their profits.
On top of that, I think it will help the country direct its resources to areas where we might see more sustainable growth. In my opinion, the long-term beneficiaries may include healthcare, education and technology.
Focus on the consumer
I’ve discussed the consumer-driven nature of the emerging markets in the past (Why EM? Why now?) and I continue to believe this is the long-term driver of growth.
It’s human nature that when people have more money they will spend beyond their basic needs to survive. They will spend on practical things like their children’s education and healthcare, as well as leisure activities.
When they feel less certain about the near-term future, this wealth effect is less robust, but that doesn’t mean they will totally cut off their discretionary spending.
My whole investment philosophy is based on investing in high-quality companies that generate attractive return on investment capital, can grow organically at a healthy pace, are protected by a sustainable competitive advantage and trade at a discount to intrinsic value.