Trade tensions between the U.S. and China sent markets into a downturn again this week, but instead of panicking, some investors are convinced that the chaos is creating a buying opportunity.
On Sunday, U.S. President Donald Trump promised to increase tariffs on $200 billion of Chinese goods to 25 per cent from 10 per cent if a deal wasn’t reached by Friday. The U.S. president also threatened to levy an additional 25 per cent tariff on $325 billion in Chinese goods.
Trump’s tweets came as a surprise to economists, strategists and investors alike who believed the U.S. and China were gearing up to reach an agreement and immediately sent the markets tumbling. While the Dow Jones Industrial Average has only lost 2.5 per cent, China’s Shanghai Composite Index and the Shenzhen Composite Index have lost 7.4 and 8.2 per cent respectively since the beginning of the week.
It’s those Chinese markets that investors should be watching, according to Stephen Innes, the head of trading at SPI Asset Management.
“Keeping an eye on China here is important,” Innes said. “With the assumption that the (trade) deal is not going to completely tank, I think buying the dip is favourable.”
Investors have seen this situation before.
When Trump infamously tweeted in December that he was “Tariff Man,” the Dow plunged 799 points that very day. The U.S. markets would continue to slide until they bottomed out on Dec. 24. Since then, they’ve rallied 20 per cent, meaning that most investors who bought in around this time, and waited patiently for a rally, were treated to handsome rewards.
Innes implemented the same strategy on Monday when he invested 70 per cent of his funds in China’s A shares. The remaining 30 per cent will be held in cash for now as Innes awaits a further decline.
….Guess what, that’s not going to happen! China has just informed us that they (Vice-Premier) are now coming to the U.S. to make a deal. We’ll see, but I am very happy with over $100 Billion a year in Tariffs filling U.S. coffers…great for U.S., not good for China!
— Donald J. Trump (@realDonaldTrump)May 8, 2019
Of course, the key to his strategy is assuming a trade deal will eventually be reached and that a rally will follow to wipe out the losses the market has accumulated.
“I can’t see these two monster economies having a complete breakdown knowing the end result is going to be devastating for both economies and the rest of the globe,” Innes said.
On Thursday, a Chinese trade envoy arrived in the U.S. and the two parties began negotiations ahead Trump’s midnight tariff deadline. The fact that China still agreed to send an envoy despite the increased tensions is a sign for further optimism that a deal will be reached, said Michael Arone, chief investment strategist at State Street Global Advisors.
Arone said that Chinese equities would make a strong entry point for some investors, especially those with high cash positions who found themselves on the sidelines due to the volatility at the end of 2018. China’s technology sector could reward investors, given that companies like Alibaba and Weibo were not immune to the dip, he said.
Outside of taking advantage of a potential rally, the fundamentals would also support an investment there, according to Vinay Pande, head of trading strategies at UBS Global Wealth Management.
Pande is still suggesting that his clients remain overweight on emerging markets through the negotiations as a way of taking advantage of the stimulus that China is pumping into its economy.
Unlike in 2018, when emerging markets were rocked and China entered a bear market, the projected earnings growth in emerging markets is 1.5 percentage points greater than in the U.S. China’s earnings per share expectations alone are more than double those in the U.S and yet valuations remain skewed, he said.
“There is nevertheless a great difference in valuation between the U.S. markets and (emerging markets) and what we’re saying is if you’re getting the same earnings stream, you have to ask yourself if the risk in that foreign market is so large is justifies the extreme difference in valuation,” Pande said.