In the extended psychodrama that is US–China relations in the Trump era, should last week be seen as a denouement?
The two countries signed a ‘phase one’ trade deal that appeared to send the trajectory of trade negotiations on a new and more collaborative course; the first time such a tangible turn has been taken since Donald Trump came to power in 2016 – perhaps longer. Investors were certainly happy to chalk it up as positive news in the short term, as it helped the S&P 500 and the Nasdaq indices to yet more record highs.
“We see any actions which ease political tensions and facilitate free trade as a positive and, whilst we focus on bottom-up stock selection rather than attempting to predict changes in political sentiment, this helps to address a potential headwind for one of our most important markets,” said Alistair Thompson of FSSA Investment Managers, manager of the St. James’s Place Asia Pacific fund.
If the deal was ground-breaking in any way, it was probably because it had been disintermediated. Gone was the World Trade Organization (WTO) as arbiter (via its dispute-resolution mechanism) in favour of a head-to-head bargaining process that weakens the supremacy of international institutions and international rules, and makes the US look stronger. When it came to the concessions, it was largely China ceding ground, although the US did revise its former assessment that China is officially a “currency manipulator”. No wonder, then, that the White House was so pleased with the deal, while Beijing publicly expressed its doubts (not least in domestic Chinese media).
However, the challenge for China is very far from over; and the same goes for the WTO. Last week, the US, EU and Japan all intensified their pressure on Beijing over what they perceive as state-sponsored capitalism, and demanded stronger rules against government subsidies. The joint statement called for a WTO ban on various forms of support and attempts to close perceived loopholes; the deal takes advantage of a WTO means of applying sanctions without gaining the support of all 164 members. Brussels has warned Beijing that the WTO could collapse if no progress is made.
Deals aside, both US and Chinese administrations face significant political and economic challenges. Last week, formal impeachment proceedings opened in the US Senate against Donald Trump on charges of abuse of power and obstruction of Congress. Trump has thus become only the third president in US history to be subjected to impeachment proceedings. The president also faces pressure over his approach to Iran, with some Republicans now siding with the Democrats to limit his scope to make major decisions unilaterally.
Meanwhile, on the economic front, US consumer prices in December rose at their weakest pace in four months. However, at its meeting last Wednesday, the Fed expressed confidence in the growth trajectory of the US economy, which it said was strong enough to obviate the need for interest rate cuts. The news was not happily received by the US president, who returned last week to his perma-theme of criticising the Fed, saying: “We’re the number one [economy] and we have to pay for our money.”
As for China, the renminbi rebounded as the deal approached, just as data showed export growth slowing to a three-year low. China’s retail spending and industrial output both showed significant hikes in data released last Friday, which boosted markets still further, not least in Europe, which is particularly reliant on Chinese consumer demand. Friday trading turned the week positive on the EURO STOXX 50, but the Shanghai Composite struggled on the Chinese currency rise and on perhaps the most important Chinese news of the week: that growth in 2019 came in at just 6.1%, its lowest level in 29 years.
However, it still fell within Beijing’s target range and last year’s numbers were undoubtedly hit by sagging business confidence, at least some of which may return in the wake of the US–China deal; and when the worst financial fallout of the African swine fever epidemic begins to ebb, at least in China. (In December, China’s massive hog population finally began to rise in number once again.) Moreover, Chinese industrial production figures published on Friday suggested some fresh economic impetus and delivered both US and European stocks a boost late in the week.
Last week, James Murdoch took the surprising step of publicly criticising News Corp, his father Rupert Murdoch’s media organisation, for pushing phoney scepticism on climate change. This was in the same week that the UK weather service published a study (backed by NASA) showing that man-made climate change was the chief ingredient in what made the 2010s the warmest UK decade on record. (There were echoes of the hugely successful recent drama Succession, which is rumoured to be based on the Murdochs and was produced by Netflix, a challenger to Murdoch in streaming services.) The recent bushfires in Australia have particularly raised the ire of Murdoch Junior, given his father’s dominance of the news market in his home country.
In the UK, the FTSE 100 enjoyed a Friday bounce, banking some of the week’s positive news, but domestic signs were more mixed. The week opened with a disappointing GDP figure, and further details about retail sales (which have now undergone their longest contraction since records began) added to the worries as it wore on. The Office for National Statistics said that manufacturing fell 1.7% in November, while services were down 0.3% – services account for 80% of the UK economy. Construction’s 1.9% rise in the same period failed to outweigh the damage. UK inflation also slipped to a three-year low, pushing up market expectations of a quarter-point rate cut at the end of January to above 60%.
“A flurry of weak data this week has sent money markets into a tailspin. But we suspect that the MPC [which sets interest rates at the Bank of England] will just about look past the Brexit and election-related distortions and will probably hold off cutting interest rates,” said Capital Economics.
That raises the question of whether the news flow has overly weighed on stocks. What is more, with Brexit due at the end of the month and a Budget in the offing, many uncertainties remain; last week, the prime minister prevaricated over whether he would indeed secure a new EU–UK deal by year-end.
“We’ve seen a big change in how the UK is viewed globally,” said James de Uphaugh of Majedie, manager of the St. James’s Place UK Growth fund. “Animal spirits in the boardroom have been dormant since 2016, but the corporate excuses to delay investment have diminished dramatically.”
The government’s review of the controversial tapered annual allowance for pensions is “underway”, according to the British Medical Association, with the findings due for publication in the Budget on 11 March.
The taper has come in for sustained criticism since it was introduced in 2016, as it adds significant complexity to retirement planning for higher-earners.
The taper means that those with incomes of more than £110,000 could have their annual tax-free pension savings allowance cut from £40,000 to as little as £10,000. The government came under more pressure recently, when it was revealed that NHS doctors were turning down overtime to avoid triggering a tax charge.
The Tory manifesto pledged to fix the problem for doctors’ pensions, and the Treasury is reportedly considering raising the threshold income for the tapered annual allowance from £110,000 to £150,000. However, experts say this would not remove the complexity of the taper and argue that any changes should apply to all higher-earners, not just one group of public sector employees.
“The taper is a problem for many, and impacts not only high-earners, but those who may fall into the threshold in the future,” said Claire Trott, Head of Pensions Strategy at St. James’s Place. “Without expert help, the average person would struggle to apply the taper correctly and get their tax relief right.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
In The Picture
When the current growth run began, the US had just come out of a crisis, and the Fed may have been offering all the help it can muster ever since, but the past decade of US growth is remarkable all the same. The chart below shows the ten longest periods of economic expansion in US history.
The Last Word
Chinese thinkers [through history] developed strategic thought that placed a premium on victory through psychological advantage and preached the avoidance of direct conflict.
Henry Kissinger – as US Secretary of State, Kissinger oversaw the first rapprochement between the US and the People’s Republic of China
FSSA and Majedie are fund managers for St. James’s Place.
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