Nordea AM: Tariffs on China may be further expanded
Nordea AM: Tariffs on China may be further expanded
By Sébastien Galy, Senior Macro Strategist at Nordea Asset Management
Trade negotiations between China and the U.S.:
‘The imposition of higher tariffs on China even as Vice Premier Liu heads to Washington D.C. to negotiate a deal leaves for very bad optics at home. The US would need to back down somewhat for China to save face; we are seeing the start of a face-saving strategy. First, there is no embarrassing leak from the US administration and second, President Trump is now being portrayed as having acted alone as his impulsive self. Having said that, China overplayed its hand recently and may still overplay it again by assuming the Trump administration is afraid of a market correction. In reality, the Trump administration is focused on getting its leader re-elected and that may well mean expanding the tariffs. The question is therefore whether the Chinese will blink first because they value short-term growth over longer-term objectives. The next few days may unfortunately be quite volatile.’
Compression in earnings:
‘A compression in earnings comes from higher wages and capital costs relative to revenues. In the latter stage of the business cycle, an economy above the output gap tends to benefit labor while monetary policy is typically tighter. The question is then whether the Fed can engineer a soft landing or if there is an accident ahead such as the collapse of a bubble. Equities will see through this dip in earnings to look at the business cycle beyond. In the case of high growth sectors, the high discount rate of cash flows makes them very sensitive to the temporary earnings compression. Conversely, mature sectors are less sensitive to a temporary bout of earnings all things equal. Is the market rational in expecting a soft landing starting in 2020? The odds of this seem good.’