Market Strategy 6/17/2019

• Traveling in Greater China last week gave us substantial background to consider how the process of globalization and technology has changed the competitive landscape.
• Opinions varied from positive to pessimistic on the likelihood of a trade resolution in the near future.
• Domestic political considerations weigh on the leadership of both nations.
• Meanwhile benign inflation data and constructive retail sales figures stateside suggest the Federal Reserve has plenty to ponder in setting policy in a disinflationary environment.

Last week we traveled to Mainland China and Taiwan to visit with institutional investors to discuss the global economic and market outlook. Our timing couldn’t have been much better to share our views and have others share theirs with us as the clock ticked towards the G-20 meeting in Osaka at the end of this month and a demonstration that included upwards of a million people that took place in Hong Kong near the end of last week.

We started our trip in Beijing. Notwithstanding all that’s taken place between the US and China around the trade/tariff war we were greeted and processed at customs and immigration on arrival at the airport (PEK) with professional integrity and efficiency.

On the way from the airport to the city we did the usual “eyeball channel check” that we do in every city we visit of traffic on the road from the airport, assessing the volume of traffic (in this case on a Saturday afternoon) and the quality and age of the vehicles rolling down the highway.

Traffic a week ago last Saturday looked heavy to us (reminiscent of big US city highway traffic) with multiple lanes packed with Beijing traffic consisting mostly of very new looking vehicles that to our eyes looked heavily represented by foreign brands (though with most vehicles likely manufactured in China). The most prominent brands we saw that day included: Honda, Hyundai, Toyota, Nissan, Mercedes Benz, BMW, Audi, Porsche, Jaguar, Bentley, Chevrolet, Cadillac, Ford with a sampling of some local brands primarily in utility vehicles (including police vehicles, buses and taxis), mini vans and various small to mid-size cars. Worth noting the highway from the airport was well paved, automated when tolls appeared to apply and extensively monitored by traffic cameras).

After checking into our hotel we ventured out to a nearby shopping mall that features many of the world’s most popular high-end brand names. Mall traffic for a late weekend afternoon wasn’t what we’d call “jam packed” but it wasn’t a ghost town either. While we were there we saw a dearth of shopping bags among the pedestrian mall traffickers but observed window shopping, and families and couples out for what looked like a leisurely stroll at the mall.

The stores that lined the mall passage ways were stylishly displayed and meticulously maintained though it looked for the time we spent at the mall that more than a few stores were somewhat overstaffed based on the amount of traffic we saw inside the stores. We were told later by a local that much of the actual shopping in China for these types of brands takes place online. Another local told us that the trade war had begun to take a toll on at least some consumer sentiment the longer it dragged on. (This latter point was somewhat illustrated later in the week when data released by China showed a drop in imports).

Where the commercial activity at the mall we visited last week was “really happening” we found it to be in a facility within the mall that housed multiple food establishments around an open concept format with trendy upscale stands where meals were prepared to order in a wide variety of menus. Tables were packed with singles, couples and families enjoying their meals.

That same evening before we published our weekly piece we dined in a restaurant situated in our hotel. It too was packed with families and travelers whom we were told were most likely from other cities in China visiting on leisure travel or business or locals from outside the center of the capital on a weekend outing. (A colleague reminded us that Beijing is a city comprised of residential rings around a center of government power, commercial buildings and historical sites of significance).

We spent Monday meeting with investment professionals in Beijing whom we’d met with when we visited last year and on Tuesday visited Shanghai for the first time since we joined Oppenheimer.
We heard concerns about the trade war, its implications for the respective economies and markets of China and the US as well as the effects it could have on China’s burgeoning technology sector. Our broad take of how they felt was that a positive resolution to the conflict was not as likely to happen sooner than later (as we expect) but rather that both sides might well dig in their heels for some time into the future leading to a protracted and damaging trade conflict.

We shared with our market peers in both cities that while we have been disappointed that a resolution has yet to be reached between the two nations, we still expect that a resolution is more than likely to take place before too much more time passes. In our view the cost of a protracted trade war is simply too high and too impractical considering the challenges and opportunities that lie on the global and economic landscape and which might be ignored and missed as a result of a protracted trade/tariff war.
We shared our view that the longer tariffs stay in place and the greater the breadth and depth of the escalation and retaliation process takes on, the more likely both economies will suffer and the more likely the leadership of both countries will experience pressure from their respective constituencies (from within and from outside their borders) to settle their differences as the effects of the trade war compound and weigh on domestic, regional and inter-regional economies across the globe.

We noted that ironically year one of the trade war had been less of a negative to both China’s and the US economy than many had expected. China’s growth last year hovered around 6.5% and the US experienced its best growth in years as GDP for 2018 reached 2.9%. We suggested that year two of the trade war might not be so kind to either country.

On Wednesday we visited with institutions in Taipei, the capital of Taiwan, with professional investors we had met last year. Similar to their counterparts on Mainland China they had concerns about the trade war but in Taiwan several had a view more akin to ours that things might get settled between the US and China before too much longer.

Last stop on our trip was Hong Kong. The demonstrations that took place in that city to protest a policy of extradition to the Mainland forced us to change our hotel reservations prior to our arrival so that we could facilitate our mobility in the financial center.

We were able to make all our scheduled meetings in Hong Kong on Friday. The professionals we met with included some we’d met in our trip last year as well as some we were meeting for the first time. As in all our previous meetings participants were candid about their concerns with mixed views as to the outcome they expected.

The trip east was well worth the effort for us in gathering opinions and having the opportunity to present our views.

We came to suggest that investors might best consider this period in the history of trade as one of transition in which nations adjust policies that have become outdated in a world markedly changed by technology and globalization. In a hyper-competitive trade landscape adjustments appear necessary in our view to provide a fairer playing field to all participants inclusive of the United States, which today finds need to protect its intellectual capital, innovation and workers’ jobs much like every other country on the planet. Transitions such as these are not easy to digest by one and all but ironically may lead to an environment better positioned to deliver global prosperity.