I've always said that everyone loses in a trade war. Now everyone is going to be a winner, according to the smiley chatter coming out of the get-together of Chinese Vice Premier Liu He with Donald J. Trump.
Trump, beaten down by his domestic problems over money for his wall, wants to build bridges. The vice premier and his team have been more constructive than Nancy Pelosi, that's for sure.
"We're trying to work out a trade deal with China. I think it will happen, something will happen," Trump said during the talks with He. "It's a very big deal. If it does happen it will be by far the largest trade deal ever made."
Chinese stocks have sparked to life this year, partly thanks to the trade truce, partly because the Chinese government has been stimulating the domestic economy in various ways. The selloff started late last January and ran through the end of 2018, at which point they'd lost one-third of their value.
In a noteworthy reversal, the main index of mainland stocks, the CSI300, was up 9.4% for the month of January. So it actually outperformed, mildly, its U.S. counterparts, with the S&P 500 up 7.9% in the same time frame.
China's market is dominated by retail investors, so it is extremely sentiment-driven. If Mr. and Mrs. Chan believe what the Chinese media is telling them -- President Xi Jinping is winning the trade war on their behalf -- then the markets in Shanghai and Shenzhen could reverse course throughout 2019. That could produce quite a run, because China stocks aren't above running up by two-thirds in a year.
Just what the trade deal would entail is anyone's guess. He, the vice premier, surprised Trump's team by announcing that the Chinese would buy 5 million tons of soybeans. That's a lot of tofu.
Trump said the two sides "are certainly talking about theft and we're talking about every aspect of trade and we're talking about fentanyl, too." So it's the Opium Wars, but in reverse. I suspect the Chinese will keep the hard drugs off the negotiating table and will agree to a lot of things they were already planning to do, or had promised the World Trade Organization they would do.
But no matter. The point is that the bullying and coercing on tariffs is over, and it's safe to say the 25% tariffs on US$200 billion in Chinese goods will not go ahead on March 1 as originally threatened.
We're set for another summit between Xi and Trump, because it would take the two leaders to ink the "final deal," Trump says. "I think we can do it by March 1. If we can get it down on paper by March 1, I don't know."
I wrote in December about the onset of the trade truce and highlighted three trade-driven stocks to watch: suitcase maker Samsonite International (HK:1910), laptop specialists Lenovo Group (HK:0992); and power tools manufacturer Techtronic Industries (HK:0669), famous for its Milwaukee Tool high-end brand.
But to play the broader market, investors should turn to an ETF, which also spreads the considerable company risk when handling any Chinese stock.
To target A shares, the Deutsche Bank group's Xtrackers Harvest CSI 300 China-A Shares Fund (ASHR) is the way to go. It is extremely liquid, with US$1.2 billion in assets, and is posting a 10.6% return year to date.
There are larger China-focused ETFs (well, three, actually), but they're not specific to Chinese domestic listings. The two biggest ETFs - the iShares China Large-Cap ETF (FXI) and the iShares MSCI China ETF (MCHI) -- include Chinese companies that are listed in Hong Kong, New York or beyond, many of which do a lot of their business outside China, too.
The third biggie China ETF is the tech-specific KraneShares CSI China Internet ETF (KWEB) , which is more tied to the Nasdaq and FANG stocks. The Chinese translation of "FANG" -- Tencent Holdings (TCEHY) , Alibaba Group Holding Ltd. (BABA) , search engine Baidu Inc. (BIDU) , consumer-goods delivery company Meituan Dianping HK:3690 and videogame maker NetEase Inc. (NTES) -- are its biggest holdings.
Those are very interesting stocks to watch, the darlings of the China universe. But they're not specifically linked to trade or any aspect of the trade-war truce.
The A shares will be most tied to Chinese sentiment. That's likely to swing positive, and this year is already seeing more positive chatter than at the end of last.
China's markets are tough to follow in terms of track record. The Shanghai stock exchange was shuttered in 1949 when the Communists took power. It was a historic footnote until November 1990, but didn't grow significantly enough to track until the early 2000s.
The CSI 300 index started as of March 29, 2002. It tracks the 300 most-liquid stocks in mainland China, with the A shares traded in yuan in Shanghai and Shenzhen.
They are very tied to the Chinese domestic economy. The biggest sector is financials (38%), with a hefty dose of industrials of various forms (27%). Consumer staples and consumer discretionary spends account for a combined 19% of the index.
That's the Chinese heartland. If the American Midwest gets to benefit from selling tons of soybeans, they'll be getting China-assembled Apple (AAPL) products in reverse. The CSI300 and the S&P 500 should continue their upward trends.
And everyone's a winner, after all.