'Trade war doesn't change China’s long-term growth potential'

Forstrong CIO explains why domestic policy, not Trump’s tweets, should be investors' focus

'Trade war doesn't change China’s long-term growth potential'

US President Donald Trump has threatened what he believes will be a knockout blow today after months of sparring with China over trade tariffs.

Trump’s inflammatory tweets and confrontational rhetoric this week have fanned the flames ahead of today’s deadline. Failure to reach an agreement by midday will see the US increase duties on $200 billion of Chinese goods.

But anyone expecting China to be a quivering wreck in the face of the loose-tongued Republican POTUS should probably think again, according to Tyler Mordy, president and CIO of Forstrong Global, who puts Trump’s latest outbursts down to typical pressure tactics.

The markets were obviously pessimistic of a last-minute resolution between the two superpowers as shares plummeted. But Mordy, a long-time China bull with a firm belief in the country’s growth prospects and its developing economic ecosystem, believes the furore over the trade war has often missed the point from an investment standpoint.

Central to this belief is that it’s not the trade mud-slinging that is the biggest factor affecting the Chinese economy. Instead, he argued, it’s domestic policy that moves the needle.

He told WP: “The net impact [of a trade war] on economic activity can be mitigated by large fiscal and monetary support. We’ve always been of the view that domestic policy holds the key to China’s growth output.

“If you look at China’s last five business cycles since the 2000s, they’ve all been driven entirely by Chinese policy shifts. The only exception would be the global financial crisis but that was still, to some extent, driven by domestic policy tightening.”

Mordy added that while a full-blown trade war is bad news for the economy long term, from a short-to-medium term cyclical standpoint it renews heightened sense of risk, which clouds the future and forces Beijing to keep policy loose.

Ultimately, whatever today’s outcome, strategically he doubts whether the tweets and tariffs will prompt a fundamental shift in the macro environment.

China, meanwhile, has coolly threatened retaliatory trade measures and Mordy said that even in the worst-case scenario - if the bilateral negotiations break down and tariffs on China are enforced - the effect is less than many in the media will would have you believe.

Most folks, he added, don’t realise that the negative effect on the Chinese economy wouldn’t be that large and that total sales to the US account for about only 3.7% of the Chinese GDP.

Domestic context is also fundamental to understanding why Forstrong believes China remains a good place for investors to be and why those who automatically married headlines with the country’s economic slowdown are wrong.

Mordy explained: “The reality was that the slowdown last year was more policy driven from a few years ago when they started this deleveraging campaign.

“The reptilian brain automatically assumes it was Donald Trump’s trade wars – it wasn’t. Around the third quarter of last year, China started stimulating fiscally and monetarily, and low and behold the economy has stabilised this year.

“There is very good evidence right now that’s filtering into the profit outlook for the China and other emerging markets. Despite what happened this week, we still expect the Chinese economy to recover.”

Forstrong’s core portfolios start with 50% exposure to Canada and 50% global before making tactical decisions, and Mordy believes that to get decent diversification an investor requires at least 50% in global markets.

However, Canadian investors are notoriously China-phobic and while Mordy acknowledges the risks, he pointed to the “massive” fact that the CPP plans to have 20% of their assets in China by 2025.

He believes the attitudes of institutional firms and the average investor towards what will soon be the largest economy in the world offers a stark contrast. And while China’s stock market has endured a rollercoaster ride in the past few decades, Mordy warned against falling back on old data.

He said: “The main issue looking back, is that leaning on historical precedent when there are powerful secular changes under way rarely serves investors well."

These changes in China revolve around significant structural reform, shifting away from exports and capital spending to consumer-led growth, improving margins and financial liberalization, which takes time.

Patience is required but the other aspect of China that should of interest for investors, according to Forstrong, is its non-correlation; the “holy grail” for a balanced portfolio.

Mordy said: “That’s getting harder as the world gets more globalised and the US is at the epicentre of that. We now we have an entirely new economic eco-system centred around China that very much rivals the US both in terms of its influence and growth potential. That’s really good news from the portfolio building perspective.”