In recent months, I have been advising investors to be cautious, because I was worried about rising trade tensions between China and the U.S.

But now that the two sides have announced trade tariffs, I have become less worried, not more worried. This is because I don’t expect a real trade war between China and the U.S. – both have too much to lose.
For now, the outlook is for a volatile market, resembling a roller coaster.

But I believe that sometime in 2018, we will have a big buying opportunity in China-related stocks. Trading at a price-earnings ratio of only 12.5, which is not expensive, China-related stocks can stage a very nice recovery once Beijing and Washington reach a deal on trade.

This deal can be reached within 2018, and I suggest long term investors can already start a process of gradually accumulating China-related stocks. This is because no one can time the precise bottom of the market and long term investors should generally ignore all the noise.

What if the two sides fail to achieve a trade agreement?

Fundamentally, the impact is actually small. If the United States goes ahead with the announced tariffs on US$50 billion worth of imports from China, Chinese exports to America would decrease by 1.6%, equivalent to just 0.4% of total Chinese exports.

The impact on China’s economic growth would be insignificant – reducing growth in gross domestic product by 0.06 of a percentage point.

Even if President Donald Trump follows up with his latest threat to extend tariffs to cover an additional US$100 billion worth of Chinese goods, the impact on Chinese economic growth would still be small – a small fraction of a percentage point of growth.

In the medium term, China is determined to reduce its dependence on economic relations and trade with the U.S. Instead, China’s emphasis will be on developing domestic sources for economic growth, especially consumer spending and improving living standards and the environment. The Belt and Road projects will also play a role.

So from my point of view, China-related stocks will be less and less vulnerable to the threat of a trade war. The China story is actually looking quite attractive, offering growth and predictability, at a reasonable price, for long term investors.

Actually Mr. Trump’s threat to use tariffs is not really credible. As a country, America depends heavily on imports of cheap Chinese consumer goods to maintain its high standard of living. America can turn away from China to other suppliers, of course, but product costs will be higher, hitting U.S. consumers hard. And China is the biggest growing export market for U.S. goods.

Also, the Chinese government has said it is very willing to negotiate with the U.S.
That’s why we can be fairly confident the two sides can end the dispute – probably within 2018.

Now the market’s biggest enemy is uncertainly and investor nervousness – not the fundamentals of the trade dispute.

Article by Value Partners Chairman Mr Cheng Hye Cheah

CategoryEconomic Update

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