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May 14, 2019

U.S./China trade war – markets want a deal

The market has been priced for perfection, anticipating a US-China trade agreement.

In this article, the SLGI Portfolio Management Team discusses the trade dispute and its impact.

At their first meeting at Trump’s Mar-a-Lago estate in Florida in April 2017, U.S. President Donald Trump and Chinese Premier Xi Jinping agree to a 100-day plan to come to an agreement on trade. Now, two years later the dispute continues with the U.S and China placing punishing tariffs on each country’s imports, but have not formally broken off talks.

Markets have been up strongly this year, but have sold off sharply in the wake of the latest round of tariffs. What do you see happening now?

The market has been priced for perfection, anticipating a US-China trade agreement. The announcement of tariffs and counter tariffs over the last week has tempered the expectations of investors. It’s anticipated that with an ongoing dispute between the world’s largest economies, we may see increased volatility over the near term.

What do you think is delaying an agreement?

The economics are reasonably straight forward. However, common ground on some of the underlying strategic issues is more difficult to find. On the one side, U.S. efforts are based on Section 301 Investigation into “China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation”.

On the other, China wants to fulfill its “Made in China 2025” program, under which it would seek to dominate global high-tech manufacturing and pursue intellectual property.

Where do we go from here? Can China give in without an apparent victory?

China has stated that it firmly opposes a trade war, but maintains that it is fully prepared for it and will deal with the matter rationally. It has also stated that the text of any agreement must be balanced and expressed in a way that is acceptable to the Chinese people, and does not undermine the country’s sovereignty.

Given the current strength of the U.S. economy, some analysis suggests it could better withstand a prolonged trade war than China.

The U.S. economy has been in a 10-year expansion and still has reasonably robust growth and strong employment. This may help alleviate the impact of trade tensions in the short term. The risk is that it may create less urgency for policy makers to find common ground. As a contingency, if economic prospects deteriorate, we may see the U.S. Federal Reserve step in and lower interest rates.

China may have more to lose, given its trade surplus with the US. However, it may also face less internal political pressure and has flexible policy response mechanisms, which may help mitigate the impact.

What could the possible impact of the trade war be on Canada?

If the trade war leads to a slowdown in the U.S., it will no doubt hurt the Canadian economy, which is highly dependent on the U.S. market. Aside from the potential impact on exports, Canada may be caught in an uncomfortable position where it needs to take sides.

With trade tensions increasing, what has the investment team done to reduce risk?

We recently shifted to a more defensive position in the Sun Life Granite Managed Solutions. As part of this strategy, we reduced our equity allocation in favour of higher quality bonds and cash. In addition, we adopted defensive option strategies on the S&P 500.


This commentary contains information in summary form for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this commentary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life Global Investments (Canada) Inc. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this commentary.

© Sun Life Global Investments (Canada) Inc., 2019. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.

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