Global Investors Could Reap Major Fruits From a US-China Trade Deal

Stock investors around the world could see significant gains in the wake of a potential U.S.-China trade deal as equities recoup much of the huge 10% discount they've traded at because of negative trade headlines, according to strategists at UBS Group AG. UBS estimates that the U.S.-China trade war has penalized the European STOXX 600 index by 12.5%, the S&P 500 index by 10.2%, the MSCI World by 9.5%, the Shanghai Composite by 9.4%, and the MSCI Emerging Markets by 6.4%, per Bloomberg. (see table below).

There is continued skepticism among many investors about the the strength and effectiveness of any trade agreement. But some analysts, for example, say U.S. stocks alone could rise nearly 11% higher. And JPMorgan Chase & Co. strategists led by Marko Kolanovic estimate that trade headlines have cost U.S. stocks $1.25 trillion in the form of lost market value.

"Equities are still pricing relatively large trade discounts,” wrote UBS. “The probability of a near-term resolution is rising, and even if our model somewhat overstates the discount priced into equities, room remains for equities to rise on a further reduction in tensions.”

How U.S.-China Trade War Penalizes Stocks

(% Penalized)

  • STOXX 600; 12.5%
  • S&P 500; 10.2%
  • MSCI World; 9.5%
  • Shanghai Composite; 9.4%
  • MSCI Emerging Markets; 6.4%

Source: UBS, Bloomberg

'Real Deal' Could Fuel S&P Record

A Washington trade deal with Beijing could lift a majority, if not all, tariffs, on Chinese goods with the promise that China would follow through on various conditions, including more stringent intellectual property regulation, according to the Wall Street Journal.

Responding to reports that an accord is near, Bank of America said that a "real deal" could push the S&P 500 up nearly 11% to a new record high of 3020. In a note last month, strategists estimated that a reversal in 2018 tariffs would boost U.S. corporations’ earnings per share growth by 1%.

Looking Ahead

Not everyone is so bullish about a U.S.-China trade deal. In fact, some experts, including Shawn Matthews of Hondius Capital Management LP, say an agreement would be a "sell signal," per Bloomberg. He views the rally in global stocks since December as sign that a classic case of “buy the rumor, sell the fact” may materialize. Also, Citigroup analysts argue that there's only a 5% chance of a "comprehensive" deal that would sharply lift stocks.

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