Don’t Panic, It’s not the End of the World Yet!

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Last Sunday, May 5th, President Trump of the US twisted in 102 words that he is going to raise tariff rate to 25% from 10% for Chinese good import value of USD 200 billion starting from Friday. This twister message has reportedly wiped out more than 13 billion USD from the worldwide stock market in a matter of just 4 trading days. All market around the globe rattled instantly. Shanghai market index dropped with large gap down more than 3% on the first trading day. It made investors felt like the end of the world is imminent.

Chart A ~ Large push up was shown in candle sticks chart with DOW in the past few trading days refreshing trade war last week.

However, when the days passed, a careful analysis tells us that US investors did not fully buy into the catastrophic idea. For example, Dow Jones Industrial index candle stick indicated that whenever there was a large drop, strong supports were there readily pushing its index markers up at market closing paring most of its initial losses (see Chart A).

Fading Trade War Fear

Just like what my article said trade war fear is fading,  its catastrophic effective was not as dramatic as before. As time passes, this trade war negative effect to global economy has been shrugged off. Investors have come to their sober senses and realize the issue was too much overblown. When the tariff hike was materialized on Friday noon time in US trading day, all US market indexes were actually closed even higher as positive gain for the trading day.

As recent US corporate earnings reports have mostly surprised those negative prediction of a slowdown, investors have changed their investment confidence and turned off psychological fear right away.

However, the story on the other side in China is entirely different.  While initial report suspected that China might cancel their negotiation trip to the US after such a threat coming out from President Trump. Nevertheless, they went ahead to the trip swallowing their humiliation though. Because they realize the Chinese economic growth cannot survive without depending on the US dollar income. They are desperate, like what Trump said, for the trade deal resolution. Without such trade resolution for their advantages, China’s unwavering economy growth is hardly sustainable.

While on Trump side, he said the US is benefiting billions of extra tax income to their coffer currently. It is not their immediate concern to reach a trade deal with China. Again, as I have said before, the trade negotiation is never a fair-trade negotiation right from the beginning. It’s actually a beg from China to allow US to continue contributing to China’s growth advantage. US side is more on the upper hand than anything else.

Disadvantage for China

On the other hand, the effect of China economic slow down would impact global economy is also another issue being too much exaggerated. According to hard cold statistic, China economic strength is merely equivalent to Australia, Japan and India combined together in terms of GPD (See Chart B).  Since China exports more goods than importing from other countries, it needs the world to absolve its products for growth rather than the world needs China for global growth sustenance.  Shall anything happen to slow down China economy, the impact to global slowdown is not that significant as it perceived to be in a global scenario, except for a few dependent countries like the ASEAN and others.  

Chart B ~ China GDP is only half of that of US and equivalent to Japan, Australia and India combined.

As a reason, the recent fiscal stimulus China implemented, is highly suspected for its long-term positive effect. As the flow of liquidity floods the China market, more factory production activities were activated as shown in recent data released, but China has yet to find enough buyers for its manufacturing products for continuous production and future growth. Without the strong US buyers, China will soon find their warehouses stocking piled up to the roof. Just like their previous housing stimulus program, China is now flooded with white elephant housing, offices, and large building structures without occupants or full use. This is nonetheless socialist governmental rule in practice.

China’s Trade War Failure with the US

On the other hand, since the size of China economy in terms of GDP is only half of the US, China is never a good opponent to fight against the trade war with the US (Chart B). Though China promised retaliation of a rate equal strength against US tariff hike, but in reality, it has never matched up with its pledge. The latest round China retaliation as reported yesterday (13/5/2019) will impose tariff hike starting from June 1st, 2019 against Trump’s last Friday move is also far under matching to their promises (Increase to 20-25% from previously 5-10% of 60 billion of US import goods).

As a consequence, China economy is badly affected as seen in its previous data released. Though China desire to shift itself from export-oriented economy to become internal consumption driven, but the shifting effort period was too short to make an effective detour. Worst still, when recent consumer confidence index dropped unexpectedly, internal consumption policy shift failed miserably. China is still an export-oriented economy at large.

While the ambitious Belt and Road Initiative (BRI) was a correct move as recently launched in 2013 by President Xi for continuous growth of China’s future, but it is now still in its infancy stage. Though how hopeful it should be for long term growth, there’s still a lot of work to be done.

If BRI is successfully done, this will be a great help to move away from USD dependency. This is the reason why the US counterparts or its alliances or Western superpowers have been criticizing the BRI so relentlessly. Everyone knows they are jealously fearful. But nevertheless, for the time being, this BRI cannot help to bail China out from US defiant trade war fight. (More will be written on this BRI subject in future blogs if time permits.)

Since China resists giving in to US’s demand for internal restructuring, out of the fear of falling into the trap like the Japanese fate (Japan was previously the second largest global economy, but it was pressed down by the US and now Japanese economy was down ever since), China’s immediate economic future will not be that promising. It is advisable to avoid China market investment for this while until fundamental data proves itself otherwise.

US Market a Brighter Spot

On the other hand, US economy’s strength is surprisingly strong standing alone globally. The main reason is the US economy has been more diversified and balanced on itself. With the large diversified and talented population attracted by its world class educational system and uniquely systematic migration policy, wide resources available,  stabilized political system enhancing its governmental environment and others, it is basically more self-reliance than globally interconnectedness as it were perceived to be. With President Trump came into power more than three years ago, he called rolling back their own foreign invested corporate capital, US economy current sustaining power is all the more sufficiently self-sustaining. (Due to space limit here, I shall write more on this subject in the future if time permits)

For the meantime, mutual fund investors can consider entering US market through RHB-GS US Equity Focus Fund or RHB US Focus Equity Fund. But enter cautiously as market can still be highly volatile caused by other global concerns such as arising Middle East conflicts, unresolved Brexit issue, Second Quarter Corporate earnings report slow down fear and the ongoing trade war agitation etc.  With the large drop again last night, the entry point has to be assessed with cautiousness too. But I believe the deeper it drops the better the opportunity arises. It possibly opens up rare opportunity for brave investors.                

Happy investing but invest safely!

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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions.  This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to conclude individual decision.

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