Tariff Tiffs and Economic Shifts
Brash and inflammatory speeches from Tariff Man have meant that China has spent a period of time under the radar and out of the headlines. Despite this, the investment opportunity in China appears to be evolving even if the world’s second largest economy is slowing down.
The key talking point here is sentiment. Fundamentally, nothing has materially changed yet, if anything conditions have deteriorated as some forecasters now believe GDP growth may fall below 3%. But if there’s any country that has a record of finding a way of making things click again it’s the Chinese. As you’d expect, “they’ll make it work” isn’t a strong investment thesis but the words and actions of Xi Jinping and those around him are starting to look more supportive of the economy.
Xi Jinping has been meeting with the country’s most important business leaders. Most notable is that Jack Ma, founder of Alibaba, has been prominent in Chinese state media’s reporting. A monumental change given he went ‘missing’ in 2020 following a speech in which he publicly criticised the financial sector. The Chinese securities regulator is also rumoured to be exploring targeted deregulation to make China a more appealing nation in which to invest, as well as improving the appeal of listing in China. Only last month CATL, the world largest electric vehicle battery manufacturer has filed to list in Hong Kong in what would be the region’s largest stock offering in 4 years.
The rather unimaginatively named “Two Sessions” (week-long annual formal government meetings), are taking place in China this week. The topics for discussion are unknown but it’s very interesting that the “Made In China 2025” project along with the government’s rolling 5 year economic plan both come to their conclusion this year. We have no crystal ball, but supportive policy is very much on the table. For this reason, we have taken our allocation to China from a marginal underweight, to an overweight.
Of course, we need to acknowledge that China isn’t without its own issues. Political risk has long caused headaches for investors in China, with the government being so dynamic and arguably inexperienced, that at times it can be unpredictable.
Unpredictability, recklessness and confusion is high in US politics – one of the best pieces of evidence I can provide you with is a quote by Trump in a recent speech – “Who the hell made these deals [with Canada and Mexico], they’re so bad!”. The last trade deal between the three nations was made in 2018, I’ll leave you to recall who the president was. We have seen a shadow cast over just about anything where there is US influence, whether that be relating to economies, security, immigration, … the list is very long. What’s upset markets the most relates to tariffs. Tariffs are a tax paid by the importer, despite Trump’s persistence that they’ll make other nations pay. Therefore, the tariffs imposed upon Canada and Mexico will increase costs upon US businesses, likely be passed on to the consumer and so ultimately, it’s the everyday person that pays for nonsensical decision making from the very top of government. We believe that Trump is throwing his weight around to get businesses to move their manufacturing to the US, but this is not something that any business can do overnight.
The BAM portfolios have been underweight since before the US election, primarily as we felt valuations were quite punchy. In addition to this, we decided to further reduce our US allocation in February due to the increasing political risk and to fund the above mentioned China purchase where we feel there is a stronger case for improving economic conditions. Despite this, it is important to remain cognisant that just as quickly as we can receive bad news, it’s very possible that Trump may announce a reversal to any of his policies which could spark a market rally.
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