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US-China phase one trade deal could boost A shares as earnings growth comes through, analysts say

Chad Bray, Martin Choi chadwick.bray@scmp.com

A phase one trade deal between the United States and China could be another positive for the latter's A-share market this year, as earnings growth is expected to be strong in sectors ranging from the software industry to the financial sector, according to investment strategists and economists.

The truce in an 18-month fight between the world's two biggest economies should ease some of the pressure on Beijing and allow China to move forward with a number of reforms, including addressing the stability of its financial system, Norman Villamin, chief investment officer for wealth management at Swiss private bank Union Bancaire Privee, said.

"We think the [phase one trade deal] is going to be very good for the A-share market in general, and that's a place where we're really focusing investors, in terms of allocating their money, in 2020," Villamin said.

UBP is bullish on the biotechnology sector, which could benefit from the trade deal, he said.

US President Donald Trump and Chinese Vice-Premier Liu He signed the phase one deal at a ceremony in Washington on Wednesday.

Trump has aggressively used tariffs to force Beijing to change decades of industrial and trade policies, adding duties to about US$360 billion of Chinese-made goods. China has responded with its own tariffs on about US$110 billion of American goods, creating an environment of uncertainty that has caused companies to delay investment and attempt to shift portions of their supply chain out of mainland China. It has also weighed on global trade.

The phase one agreement included commitments by China to buy over a two-year period at least US$200 billion of American goods and services more than it did in 2017, including agricultural products and manufactured goods.

China has also agreed to lift barriers on a number of US exports, including beef, poultry and infant formula. Beijing also has pledged greater financial market access and intellectual property protection.

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"A phase one deal, I would say for Asian exports, it reduces a drag," Frederic Neumann, co-head of Asian economics research at HSBC, said. "It doesn't necessarily cure all the challenges that we see in the export space. We see a gradual recovery of trade this year."

Analysts have, however, expressed scepticism over whether the deal will pave the way for further agreement on more difficult issues between the two countries, such as China's support of its state-owned enterprises. Also, neither country plans to remove tariffs put in place over the past 18 months, as part of the deal.

"The agreement is a positive step, but an extremely modest one, which will defer the most important " and difficult " issues to subsequent negotiations," said Stephen Olson, research fellow at the Hinrich Foundation, an independent research foundation focused on global trade. "Unless and until those more difficult issues [such as industrial policies and subsidies] are meaningfully addressed, the trade war might simmer down, but it will not be resolved."

Global trade to improve in 2020 as phase one deal moves closer

Olson also said there were legitimate questions about whether the terms of the agreement will be fully implemented.

"The agreement could help boost bilateral exports by the two economies and lead to an improvement in business confidence, as well as investment," Michael Taylor, managing director for credit strategy and standards at Moody's Investors Service, said. "But the details of the agreement suggest that there remains considerable scope for friction between the two sides, and Moody's continues to expect tensions between China and the US to wax and wane in the years ahead."

David Chao, Invesco's global market strategist for Asia-Pacific, excluding Japan, said investors should react favourably to the signing and A shares looked attractive "as the removal of tariff uncertainty should give a boost to both investor and local business sentiment".

"The most important part of this signed deal is that it removes a significant geopolitical overhang and remediates the threat of additional escalation between the world's two largest economies," Chao said.

Asian markets were mixed on Thursday, with indices rising in Hong Kong, Korea and Japan, but declining in mainland China. The Hang Seng Index rose 0.4 per cent to 28,883.04 on Thursday, while the Shanghai Composite Index declined 0.5 per cent to 3,074.08.

Analysts have said investors had already priced in a potential phase one agreement into the markets since it became clearer in December the two sides were moving closer to a deal.

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Herald van der Linde, HSBC's head of equity strategy, Asia-Pacific, said earnings growth in China should be a more important driver for equities this year.

"The impact for listed companies is not as big as what it is for the rest of the economy," he said. "We're actually starting to see a bit of earnings upgrades starting to come through in China, but it's really minuscule."

The rise of empty nesters in China, strong growth in parts of the software industry and the banking sector, alongside increasing automation are likely to drive earnings at Chinese companies this year, he said. "They, by far, offset some of the negativity. So, I'm not so worried or positive either on the impact [of the trade deal] on earnings for Chinese companies."

At the same time, HSBC's Neumann said Hong Kong's economy, which has been hurt by months of street protests, could benefit from the trade truce.

HSBC, the city's biggest bank, expects its economy to contract by 0.7 per cent in 2020, but expects a recovery to start in the second half of the year. It also expects the Hong Kong economy to grow by 2.8 per cent in 2021.

"Logistics is still a very integral part of this economy," Neumann said. "We see, therefore, logistics activity increasing. What we've seen in the past year will become stronger as well " intra-Asian trade corridors and supply chains becoming stronger. Even as the trans-Pacific relationship cools, or may be [become] completely stuck in terms of trade volumes, we actually see that increase in regional activity come through. That should benefit Hong Kong."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.