Here’s What to Do in the Lead-Up to the China Deadline

Here's What to Do in the Lead-Up to the China Deadline
iStock.com/masterSergeant

China Deal or Framework Will Lift Stocks

Traders and market participants will be anxiously listening for any clues on how President Donald Trump will proceed with the China trade war, as the initial deadline is set to expire on March 1. No deal or extension and we could see 25% tariffs collected on all Chinese imports and a real threat to global economic growth. Note that this is, however, the worst-case scenario.

It is widely known that Trump equates the direction in the stock market to his policy and economic success. Because of this, I wouldn’t be surprised if we see some sort of framework that would boost the stock market and please everyone (for now).

But the reality is that much of the expectation of a trade resolution has already been taken into account in the stock market, evidenced by the superlative rally from the December lows.

I doubt that a firm deal will be announced by March 1. There was simply too much to deal with in the short 90-day discussion window. Now, even with an expected extension, there is absolutely no guarantee that a final deal will surface.

Advertisement

The stock market will likely jump on this news back to the January 2018 highs, but any further gains may be difficult. I am also betting that a deal will help the global economy avoid a slowdown, which appears to be in the works. This will be a critical factor to monitor.

But let’s say there is an extension to the talks. I would expect a rally in stock markets in the U.S., China, the emerging markets, and the rest of the world.

The Next Step

It may simply be a relief rally, but there will be opportunities to buy or sell into strength (if you believe a firm deal will not be achievable).

As far as Chinese stocks in the stock market, I expect some buying momentum to re-energize the battered Chinese technology sector. More specifically, I’m thinking of big-name stocks like Tencent Holdings Ltd (OTCMKTS:TCEHY, HKG:0700), Alibaba Group Holding Ltd (NYSE:BABA), and Baidu Inc (NASDAQ:BIDU).

You can also play a potential bounce via the iShares China Large-Cap ETF (NYSEARCA:FXI), which is heavily weighted in financial services and less in technology.  The FXI has recently outperformed the S&P 500.

Chart courtesy of StockCharts.com

But if you still want decent exposure to the Chinese stock market but also access to the emerging markets, then consider the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM). Based on the diversified MSCI Emerging Markets Index covering over 1,100 mid-cap stocks to large-cap stocks in 24 emerging markets, China accounts for about 31% of the fund.

Chart courtesy of StockCharts.com

And for those of you who are only interested in U.S. companies, you might want to focus on the large multinationals with decent exposure in China. Many of the non-financial and energy stocks found in the Dow Industrial would meet this criterion.

Analyst Take

If the speculation is correct, I would expect a stock market rally leading to March 1 and further gains, depending on the scope of the U.S.-China trade framework.

But whether the gains will be sustainable is unclear, especially since decisions can change quickly in the White House.