September 13, 2019

News in Charts: Investors complacent about US–China deal?

by Fathom Consulting.

Fathom’s China Exposure Index (CEI) measures the equity performance of US companies that have a significant sales presence in China. It includes companies that derive greater than 15% of their revenue from China, with their equity prices measured against relevant sector benchmarks. Firms with a higher revenue share have a greater weight in the index. Since 2018, when the US first announced tariffs on imports from China, the index has ebbed and flowed, posting gains when Sino–US trade tensions have eased and vice versa.

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The resilience of the index since May, after trade talks broke down, has been somewhat surprising. The CEI has declined by just 5% since then — a relatively modest amount considering that the US has significantly increased the effective tariff rate on Chinese imports in the intervening period, and China has also announced retaliatory measures. Under current policy, by the end of the year, the effective tariff rate on US imports from China will have increased by 21 percentage points since 2018. Of that potential increase, 9 percentage points has been implemented since May, with another 6 percentage points due to come in by the end of the year.

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There are a couple of possible explanations for the relative strength of the CEI given recent tariff increases. It is possible that investors believe that looming duties on popular consumer products coupled with the US election cycle will hasten a last minute ‘deal’. Alternatively, investors may believe that the stimulus enacted by Chinese officials so far this year, including interest rate cuts and an apparent end to deleveraging, will be sufficient to shore up growth, helping US firms with a large presence there.

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Notwithstanding some signs of thaw in recent days, the bigger story is that US trade policy is being driven in part by national security and geopolitical concerns that are unlikely to go away anytime soon. Trade tensions are secular, not cyclical risks. Meanwhile, our own estimate of China’s economy points to a sustained slowdown leaving economic growth significantly below official estimates, despite new policy measures intended to shore up activity. All told, the risks to the CEI appear to be skewed to the downside.

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The charts in this article have been created using Chartbook on Datastream. The Chartbook, created and maintained by Fathom Consulting, is a library of over 9000 charts, containing up-to-date macro and financial market data for over 170 countries. Whether it is a particular topic, country or variable you are interested in charting, the Chartbook has everything you need. Simply type search ‘cbook’ into your Eikon search bar or click the ‘Chartbook’ tab on Datastream to find out more.

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