Chinese social media users are depicting President Donald Trump as the Avengers’ super-villain Thanos who destroyed half of the population in the world. In this case, the damage was caused by 2 tweets which instantly caused Asian stocks to tumble, with the China's stock market leading the way by falling more than 5%.
With the market confident that a trade deal is about to be signed, the tweet caught the market by surprise as investors are unsure how the Chinese government will react to the threat.
Why The Sudden Tweet
After the initial backlash from the trade war in 2018, the US economy has soared back, stronger than before. The US GDP for Q1 is at 3.2% topping expectation and is one of the best growth figure in the past decade. The stagnant wages of Americans saw a breakthrough in 2018 with wage growth at a quick pace. Since the 2007 financial crisis, the average US citizen has been deleveraging with household debt fallen from 144% of income to 99% of income. The trade wars did not create any significant impact on the economy other than the big stock market correction, which quickly reversed itself when the US Federal Reserve signaled that they will hold the brakes on interest rates for an extended period of time.
President Trump believes that the US economy will be able to weather further escalation to the trade war and this has emboldened him to raise the stakes, since he has more leverage.
China Economic Situation has also Stabilized
On the other hand, the Chinese economy has stabilized after various economic measures taken by the Chinese government to shore up the damage done by the initial bout in the trade war. After assessing the situation, they could have concluded that they may have the resources to battle it out with US if the trade war do escalate.Sources said President Xi Jinping earlier vetoed extra concessions proposed by his negotiators and presented a tougher proposal to US, which may be the cause of President Trump's trade war tweet.
Will the trade agreement scheduled to be completed in June be scuttled? Many analysts feel that a trade agreement will be signed eventually but the current June deadline may not be able to meet at both economic titans jostle for a more favorable position leading into the negotiations. While we are not quite sure how this will turn out, one thing we can be sure is that there will be more stock market turbulence as the war of words continue to ring from both sides.
Portfolio Strategy
The month of April has been an extremely good month with the cash portfolio returning 3.02%, and the CPF-OA portfolio returning 1.82%. As the market undergoes more turbulence due to the increased tension from the trade war, I see it as an opportunity to make some adjustment to the portfolio.The first adjustment I will be making is to convert CPF-OA Fidelity American to Franklin Templeton US Opportunity Fund. One of reason why the CPF-OA fund is underperforming the Cash component is due to the relative underperformance of Fidelity.
The other change that I am making is pertaining to a change of the RSP from Asia equities to US equities. Currently, most of my clients are saving into Asia Pacific equities. However, as more and more major Asian companies and innovative start-ups choose to list in US, the US stock market becomes a better representation of the next frontier of global growth rather than blindly following the old paradigm that Asian equities is risker and therefore gives more return. In the past decade, the spectacular growth rates of the Asian economies did not translate into equivalent returns in terms of the risk taken. Therefore, it is more beneficial for my clients to RSP into a region that presents a more attractive risk/reward proposition.
I will start contacting you on the procedure for the switch. Stay tuned!
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