The agreement to keep talking for 90 days during which tariffs are paused is an upside surprise. From an Asia perspective it means constructive progress. We see slight upside in our 2019 growth outlook. Our New MSCI China Target of 82 (+9%) now has more upside than for EM (+6%).
Outcome of US-China presidential meeting at G20 was better than expected. The US agreed to pause tariff hikes on US$200bn of Chinese goods on Jan.1, 2019, and China agreed to start importing more US agriculture products immediately. Both sides will start further trade negotiations on structural issues in the next 90 days. If no agreement is reached in 3 months, the US will raise tariffs on US$200bn of Chinese goods to 25%.
China Economics: Restart of trade talks positive for China’s business confidence, posing slight upside to 2019 growth: The pause of further tariff action is better than our baseline assumption of a 25% tariff on US$200bn of Chinese goods by Jan. 1, 2019. Trade negotiations in the next 90 days will be key to watch, and the road could remain bumpy toward a full resolution. We believe China needs to address key structural issues including IPR protections and industrial policy in future trade talks, which is consistent with China’s domestic economic reform agenda. While we retain our view that China’s GDP growth could decelerate to 6.3% in 2019 from 6.6% in 2018, an eventual de-escalation of trade tension would pose upside risk to our 2019 growth trajectory.
Equity strategy: Upgrade of MSCI China to OW versus MSCI EM – New MSCI China Base Case Target of 82 (+9%), Hang Seng 29,850 (+13%), HSCEI 12,100 (+14%) and CSI 300 of 3,650 (+15%): This G20 outcome represents a move some way (though not fully) towards the Bull Case scenario for US/China trade tensions that we outlined in our 26 Nov. year ahead outlook piece.
Although we are entering a 3 month negotiation period, our own Base Case and that of the market we think was that the 1 Jan. 25% tariff would go ahead. We therefore raise our multiple assumption by 0.5x P/E points for the offshore China equities indices and by 0.3x P/E points for the onshore markets.
This leads us to raise our Base Case MSCI China target from 79 to 82 (+9%), Hang Seng from 28,500 to 29,850 (+13%), HSCEI from 11,360 to 12,100 (+14%) and CSI 300 from 3,550 to 3,650 (+15%). Given there is less upside to our unchanged MSCI EM Base Case Target of 1050 (+6%) after recent gains, we raise MSCI China from EW to 100 bps OW.
As we continue to be bullish our other key EM OWs of Brazil, India, Indonesia and Thailand, we fund this change of stance on MSCI China by increasing our UWs on Mexico and Australia to 250 bps each.