Thanks to the Conservative landslide, Brexit has taken a step forward. The other interminable story that has dominated international news this year, the U.S.-China trade war, also appears to be approaching not an end, but at least a truce.
It seems that the Phase 1 trade deal ... call it a mini-deal ... has been approved by U.S. President Donald Trump and his team.
Considering that the top two stories on Friday for the Global Times, Beijing's international relations mouthpiece, are "Capitalism is losing its appeal to Chinese" and "China will lead new Asian order, 'Asian century'," it's safe to say the Chinese side have not entirely signed off on the agreement. As the trade war has intensified, the publication seems to have stopped reporting much news and emphasized such commentary.
The lack of Chinese excitement over the deal raises the specter of it all falling apart again. The Chinese negotiating team returned from Washington with a full trade deal months ago, only to have Chinese President Xi Jinping tear up their homework and tell them to submit it all again.
But the markets clearly expect that we'll get some progress. At the very least, it seems that Sunday's U.S. tariffs on $156 billion in Chinese goods, many of them popular consumer items, will not go into effect.
The CSI 300 Index of the 300 largest stocks in Shanghai and Shenzhen closed up 1.8% on Friday. In Hong Kong, where the China-focused stocks have been hammered by the trade war while city-specific stocks have been hit hard by six months of demonstrations, the Hang Seng Index climbed a frothy 2.6% for the day.
I indicated a week ago that investment banks such as Goldman Sachs and Citi have been advising clients to buy Hong Kong stocks. Mohammed Apabhai, the head of Asia Pacific trading strategies at Citi, has even said the market could rally as much as 40%.
Subway operator MTR Corp. (MTCPY) and Hong Kong's flagship airline Cathay Pacific would be two prime city-specific stocks that would outperform if the rally continues.
For investors looking to play the whole market, the iShares MSCI Hong Kong ETF (EWH) is the behemoth, with $1.7 billion in assets under management. The other two Hong Kong funds both have less than $20 million under the hood. They may have the advantage of a slightly greater city-specific focus. The Franklin FTSE Hong Kong ETF (FLHK) is capped and so gives slightly greater emphasis to mid-caps, by ensuring large-caps only make up 50% of assets, and the SPDR Solactive Hong Kong ETF (ZHOK) also aims to emphasize mid-caps.
There's relative calm on the demonstration front, as marches continue albeit with less violence. It seems the troops in the U.S.-China trade war are now emerging from the trenches to shake hands in no-man's-land as well.
For mainland China exposure, the Xtrackers Harvest CSI 300 China A-Shares Fund (ASHR) has been the standout performer this year, up 30.6%. By restricting itself only to A shares, it has a very mainland-specific focus.
The Investco China Technology ETF (CQQQ) (up 31.3% in 2019) and KraneShares CSI China Internet ETF (KWEB) (up 27.0%) have also performed very strongly this year. But they're obviously sector specific, and a sector that is not likely to benefit in particular from the trade truce.
Investors could turn to the iShares China Large-Cap ETF (FXI) for exposure to the Chinese companies likely to have the greatest international exposure. It is a laggard among China-specific index funds, up only 10.6% this year, but should now outperform if exports pick up.
What's in the deal? We still don't really know. Even now it appears that the office of U.S. Trade Representative Robert Lighthizer will issue the necessary "notice of modification" to suspend the tariffs without it being settled.
But I'm more confident that there is actually a Phase 1 deal of some kind being written in invisible ink. It will be revealed shortly, we all in Asia hope.
It seems that the United States may roll back other tariffs already in place. In return, China would agree to buy $50 billion in U.S. farm goods in 2020, double the level of purchases in 2017, before the trade spat began.
Besides stocks, currencies are also responding. The British pound is surging on the U.K. election results, and the Chinese yuan has risen to its highest level in four-and-a-half years against the U.S. dollar.
Trump has railed against a strong U.S. dollar. So these dual events are an unexpected and sudden benefit to U.S. exporters, whose purchases are now slightly more affordable in both Britain and China.
China is also due to impose retaliatory tariffs of 5% to 10% on U.S. goods on Sunday if no deal can be reached. Presumably, these will also be postponed at the last minute instead of going into effect, one hour on Sunday before the U.S. duties are due to rise.
Washington had in October, according to Reuters, offered to postpone Sunday's higher trade taxes, as well as cut the existing tariffs it has already put in place by 50%. As I indicated on Wednesday, this would suit Trump, since perversely he would be able to threaten China with tariffs once again. For now, if Sunday's duties do go into place, markets would sell off dramatically and U.S. negotiators would have essentially raised all the tariffs that they can humanly raise.
It seems that, at the last minute, such a stand-off will be avoided. The dueling nations may holster their tariffs for the time being. This gives Chinese and Hong Kong stocks impetus that should sustain them well into the new year.