China recently released a new trade report amidst the hotly debated issue of U.S./China trade relations. What might China’s new data mean for the markets and investors? To learn more, we interviewed Elaine Tse, Portfolio Manager for the SF Global Emerging Markets Team. Watch the video.

 

Elaine, what do you think are the most noteworthy takeaways from China’s new trade report? And have you seen anything from the trade report—or trade dispute—that might influence your positioning?

 

U.S. China trade tensions have been elevated since May. We expect markets to remain volatile and therefore we remain defensive in this current environment, with a focus on domestic exposure—and we prioritize earnings visibility. In the long run, though, of course we expect China to move up the value chain to become a technology leader globally. And in order to achieve this, China will try to achieve what we call “silicon independence” and invest substantially in semiconductors.

 

The trade report showed exports recovering, but by no means is there an export recovery. This is most likely just a little bit of front-loading in anticipation of higher tariffs. The more interesting number is the degree of import decline, which is substantially below people’s expectations. But, this is not all bad because the Chinese government then will continue to introduce supportive policies to stabilize the economy. Our other takeaway is that commodity prices are rolling over and that’s evident in the set of reports—and it supports our decision to reduce our exposure to metals, mining, and energy.

 

Two additional economic indicators were also just released, China’s consumer price index (CPI) and producers price index (PPI). What stood out, and how does the data affect the investment landscape? 

 

We expected CPI to remain around 2.5% to 3%, and PPI to pace around 1%. Globally, there’s really very little inflation pressure. The higher CPI in China is really from pork prices from swine flu. And what this suggests to us is that the global central banks will have the leeway to cut rates. Everyone’s looking at the Fed (Federal Reserve). The Fed is increasingly dovish. We expect the strength of the U.S. dollar to have peaked and to level off, potentially decline, and we expect the RMB (renminbi) to weaken not much more beyond the current 7-RMB-to-the-dollar level.

 

Looking beyond the trade war headlines and even near-term data points, what is one long-term China trend that provides a compelling investment opportunity?

 

The one irreversible, irrefutable trend in China is the upgrade of the Chinese consumer. Regardless of trade war economic cycles, this trend is intact. It is currently most evident in second- and third-tier cities, as income growth is outpacing first-tier and rural. And when we talk about consumption it really covers a broad range of products, from staples to auto and home appliances to services. So that would be travel, leisure, and education. And this is one of the strongest trends in emerging markets, in fact, because right behind the 1.3 billion Chinese consumers is another 1.3 billion from India.

 

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