The Asian tycoons who beat Donald Trump
Right up until his death in 2016, Cheng Yu-tung was a true lion of Asian business… Typical of many Chinese billionaires, his success came from humble beginnings.> READ MORE
Right up until his death in 2016, Cheng Yu-tung was a true lion of Asian business… Typical of many Chinese billionaires, his success came from humble beginnings.> READ MORE
Get ready… if history is any guide, 2018 could be a weak year for U.S. and Asian stock markets. For starters, we’ve been saying for a while that the “Trump> READ MORE
How solid is the current economic recovery? In late April I argued that the recovery was faltering and that cracks were starting to appear in the “Trump> READ MORE
Common sense would suggest that political uncertainty should weigh on a country’s stock market. If investors can’t determine with a reasonable degree of> READ MORE
Until not long ago, U.S. President Donald Trump was intent on waging a currency war with China. Now… he’s not. What changed? Let me explain. “I will> READ MORE
Canapés and missile strikes, but no Big Macs “I would not be throwing him [Xi Jinping] a dinner. I would get him a McDonald's hamburger and say we've got to get> READ MORE
China’s President Xi Jinping arrives on U.S. President Donald Trump’s home turf tomorrow for a hugely anticipated showdown between the leader of the world’s> READ MORE
In October 2008, in the throes of the global economic crisis, legendary investor Warren Buffett famously wrote: “Be greedy when everyone is fearful,> READ MORE
Right up until his death in 2016, Cheng Yu-tung was a true lion of Asian business…
Typical of many Chinese billionaires, his success came from humble beginnings. He started in the jewellery business in Macau in the late 1930s. He later inherited and grew the family business.
From there he moved, like so many of his generation, into property in Hong Kong, in the 1960s.
Forget diamonds and gold… real estate is where real money was made.
Cheng Yu-tung was a highly regarded businessman who extended his reach beyond property and jewellery into infrastructure, retail and hotels.
His core company was New World Development (Exchange: Hong Kong; ticker: 17). His jewellery company was Chow Tai Fook (Exchange: Hong Kong; ticker: 1929) for more than 30 years.
In my investment banking days, I was part of the team that took New World’s China property business public. It was one of the earlier China property sector IPOs.
New World was a pioneer, showing how foreign companies could take on China’s fledgling property markets in a big way.
Asian property investors and developers have often struggled when entering foreign markets, but one example of a “win” involved the Cheng family and a fellow Hong Kong tycoon, Vincent Lo, another property tycoon with big real estate interests in Hong Kong and China… and, as it would happen, an American developer named Donald Trump.
This particular deal initially dates back to the 1970s. But it really took shape in the mid-1980s. It involved the Manhattan West Side Yards, a 77-acre site on Manhattan’s west side.
The owners went into bankruptcy and the site fell into the hands of banks. Trump’s role in this began in 1985, when he acquired the Yards from another distressed developer for US$115 million.
Given Trump’s frequent incursions into bankruptcy and financial distress, it’s not surprising that it didn’t take long for this asset would fall into the “distressed” bucket again.
In the early 1990s, the site, under Trump’s control, was bleeding cash. The New York property market was undergoing a correction at the time, which didn’t help.
Trump’s bankers forced him to relinquish control of the site.
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The new owners? The Cheng family and Vincent Lo.
In 1994 they paid US$82 million, and assumed the roughly US$250 million debt that Trump had accumulated.
The new owners set about developing the site with up-market condos and other uses. Trump was entitled to a share of the profits from property sales, and took management and construction fees during the build.
In 2005, the Hong Kong team agreed to sell the development for around US$1.76 billion.
And that’s when Trump screamed blue murder.
The case ended up in the courts.
Trump tried to sue the pants off the Hong Kong partners. His argument? They should never have sold it for that price. It was worth much more, he contended.
He refused to accept his share of the proceeds of the sale.
Over the next four years, the case dragged on, producing 166,000 pages of documents for the court.
Trump accused his Hong Kong “partners” of all sorts of infringements… from tax evasion to fraud.
His compensation was a minority interest in the New York and San Francisco Bank of America Buildings (which were recently worth around US$640 million, according to Bloomberg).
Trump of course has since said that this was a great deal… and that he won! One of those times he “beat China”…
One lesson? This illuminates the character of the U.S. president, for one thing. More broadly, though, this story demonstrates the importance of retaining control over investments where possible.
Trump was a minority shareholder in the project and couldn’t drive it as he wanted. Despite having his name on the buildings, he was a passenger.
Whenever possible, don’t be a passenger… it’s your money.
Get ready… if history is any guide, 2018 could be a weak year for U.S. and Asian stock markets.
For starters, we’ve been saying for a while that the “Trump rally” is getting old. Maybe more to the point, the MSCI All Country World Index (which reflects the performance of global stock markets) posted an unprecedented streak of monthly gains in 2017 – a streak that can’t go on forever. And U.S. stock market valuations are higher than any other time in history, except for the late ‘90s dotcom bubble.
Today, we’re showing you another indicator that shows we could be in for a below-average year: the U.S. election cycle.
The economic cycle and market valuations generally play a bigger role than presidential politics in the movements of U.S. markets. But in the past, American presidential elections still have a significant impact on the U.S. stock market. The cycle of anticipated policy changes, economic stimulus, the fantasy that real positive change might happen, and, of course, disgust and despair at politics as usual, all figure into markets.
As we’ve shown you before, U.S. markets have historically done well in a post-U.S. election year, which was 2017. This has little to do with the identity of the person who happens to be sitting in the American White House.
Since 1928, the S&P 500 has risen, on average, by 5.1 percent in a post-election year. In 2017, the S&P 500 rose around 20 percent.
In pre-election years (which we define as the calendar year that’s before the year in which a presidential election takes place), the S&P 500 has risen on average by 12.8 percent.
But, on average, the S&P 500 has seen the worst performance in the second year of a U.S. president’s four-year term (which is 2018 for this cycle).
This cycle holds true in Asia, too.
Surprisingly, Asia’s stock markets have been more affected by the American presidential election cycle – especially when a Republican is in power – than the U.S.’s own stock markets. (An important caveat, as I’ll explain below: There isn’t that much history for this, as Asia’s stock markets are a lot younger than those of the U.S.)
In the past, when a candidate from the Republican party of the U.S. has become the country’s president, Asia’s markets (measured by the MSCI ex Japan Index) overall have performed well during the first year of the new president’s term, rising just over 19 percent on average. In 2017 (the first year of a new Republican party president) the MSCI ex Japan rose nearly twice that, 34 percent.
And like in the U.S., things take off in the third year (which will be 2019) of a Republican president’s four-year term. During this year, the MSCI Asia ex Japan Index has seen average returns of nearly 36 percent. Hong Kong’s stock market has risen nearly 33 percent, Singapore and Malaysia have seen average returns of 31 percent and 24 percent, respectively.
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But during the president’s second year (which will be 2018), there’s a slump. The MSCI Asia ex Japan Index has seen average returns of 3.4 percent. Hong Kong’s stock market has risen only 3.6 percent and Malaysia has seen average returns of -2.3 percent. Only Singapore wins in the second year, rising 11.7 percent.
For our purposes in the graph above, we break the election cycle down into four periods:
1. Post-election year: The first calendar year after the U.S. presidential election. That was last year – 2017.
2. Midterm: The second year. This is 2018 in the current cycle.
3. Pre-election: The third year of the president’s term, which is also the year before the next election. This will be 2019 in the current cycle.
4. Election year: The fourth year of the president’s term, and the year in which elections are held. 2016 marked the election year in the previous cycle, and 2020 will be the current cycle’s election year.
However, the sample size for the Asian market results is small. The indexes that we’re using – and Asia’s stock markets – haven’t been around for many four-year American presidential cycles. And broken down by the two major U.S. political parties, the sample size is even smaller.
For instance, the MSCI Asia ex Japan Index has only seen seven U.S. presidential election cycles, covering three Republican presidents and four Democratic presidents. The small number of data points means that historically unusual periods (like big stock market losses during the global economic crisis in 2008, or particularly strong years for the stock market) have a very big impact on average returns.
Only rarely does American foreign policy towards Asia have a direct impact on stock market performance in Asia. Far more important is the role of American politics on U.S. market movements, and on global stock market sentiment – and therefore also on Asian markets. This may play out in a more important way in smaller, less liquid markets in Asia (where a smaller absolute sum of funds invested or withdrawn can have a far greater impact than in bigger markets). So positive or negative sentiment in the U.S. with respect to American policy, and presidents, might impact smaller Asian markets more than others.
Twitter-happy U.S. President Donal Trump could also impact Asian markets more than usual – and markets could deviate from the election cycle norm. In light of Trump’s unorthodox policies and positions, stock market performance patterns may be completely different over the next three years from the past. And recent changes to the tax code in the U.S. may have a positive impact on markets.
But if the U.S. election market performance cycle remains intact – as it has so far – it’s looking like 2018 could be weak for most Asian markets.
Publisher, Stansberry Churchouse Research
How solid is the current economic recovery? In late April I argued that the recovery was faltering and that cracks were starting to appear in the “Trump rally” in US equities.
I wrote then that a stock market can rally on promises – in the case of the Trump presidency, promises of lower regulation, tax cuts, and infrastructure spending. But it takes concrete results to sustain it, and those results aren’t being delivered.
US equity markets have continued to grind upwards. The S&P500 is up another 2.1 percent since I raised the idea that the Trump rally was sitting on a shaky macroeconomic foundation in late April. And it’s up 8.5 percent in 2017 so far.
The CBOE S&P 500 Volatility index (or VIX), which measures the expected level of equity market volatility has fallen back below 10. This means investors are not bracing for a sharp decline in US equity markets any time soon.
Meanwhile, US economic data continues to be weak.
Last weeks’ US nonfarm payrolls (NFP) data were not encouraging. NFP data provides month-on-month changes in US employment. It’s a key barometer for overall economic health. In May data showed that 138,000 jobs added that month versus expectations of 182,000. That’s a 25 percent miss.
More interesting is what’s going on in the US treasury market.
In the aftermath of Donald Trump’s electoral victory in November, 10-year treasury yields shot up from less than 1.8 percent to 2.6 percent in the space of a month.
When bonds prices fall, yields rise.
This was all part of the “Trump rally” in equity markets. The view was that a Trump presidency would lead to faster growth, higher inflation – and therefore faster interest rate rises. (If the economy grows faster, the U.S. Federal Reserve would likely boost interest rates faster .
As a result, the market sold US treasuries (which perform poorly in a rising interest rate environment). (For bonds, a higher yield equates to a lower price.)
The chart below shows the Commitments of Traders (COT) report on net US treasury futures positions in 2016, up to the end of February 2017. Treasury futures are contracts to buy or sell US treasuries for a specific price at some point in the future. They are extremely liquid instruments used by traders and asset managers to hedge or bet on US treasuries.
This COT data is published weekly and shows to what extent the market is long or short (i.e. betting against) the price of the 10-year US treasuries.
A positive number means the market is generally long US treasury futures contracts, which means traders think bond prices will rise (and hence yields will fall).
A negative number implies the market is betting against treasuries and expects the price to fall (and hence yields to rise).
As soon as Trump was elected, the net futures COT numbers went negative. That is to say, the market began betting heavily against US Treasuries.
The market was anticipating that the price of Treasuries would fall. And it did. Treasury yields increased and bond prices fell.
The graph above shows data from January 2016 up to the end of February this year.
You can see in November 2016, when Trump won the election, that 10-year yields rose quickly, and the net COT postion went negative i.e. traders began betting heavily against the US treasury market.
But take a look at the next chart below. This shows you the COT numbers up the end of May, and in the context of the past decade.
You can see that in recent months traders have suddenly switched from betting heavily against treasuries, to betting heavily on treasuries. It’s the largest and fastest swing ever recorded (in data going back to 1993) in such a short time period.
The reality is, if the US economy is in such good shape, and interest rates are likely to rise as a result, then the market wouldn’t be betting so heavily on treasuries all of a sudden. If the bond market is boss, then right now it’s saying you better look out… the Trump rally and economic recovery aren’t a ‘given’. Traders are now positioned more bullishly on the US treasury market (i.e. betting bond prices will rise and yields will fall) than any time since 2007.
Let me be clear: if the market was optimistic on the US economic outlook, you simply would not see so many people betting on the US treasury prices rising.
Because of US economic frailties, I suggested earlier that investors look at shifting some of their US equity exposure to Chinese equity markets. I cited a relatively strong economic foundation and stabilisation in the renminbi, the Chinese currency.
Specifically I said “We are bullish on H-Shares.” (H shares are Chinese companies listed in Hong Kong.)
It’s early days, but since then H shares have outperformed the S&P500, with A shares (Chinese companies listed in China) not far behind.
We’re still bullish Chinese equity markets. And in our most recent edition of The Churchouse Letter, Peter makes his case why…
Common sense would suggest that political uncertainty should weigh on a country’s stock market.
If investors can’t determine with a reasonable degree of certainty which policies will be enacted and when – such as whether taxes will be cut or not – it stands to reason that stocks should be less attractive.
Back in January, I wrote that the U.S. was about to become the world’s largest emerging market. I said:
Political risk expert (and a former boss of mine at Eurasia Group, a political risk analysis consulting company) Ian Bremmer defines emerging markets as “those countries where politics matters at least as much as economics for market outcomes”. This suggests that the usual suspects that investors look at for signs of market trajectory – economic growth, inflation, interest rates, for starters – are downgraded to only be as important as politics. And in some cases, individual leaders can change institutions, further swaying markets.
According to this definition, the U.S. is taking on some of the characteristics of emerging markets – that is, where political risk matters more.
U.S. President Donald Trump moves markets with politically motivated comments about companies, industries and countries in a way that’s far more common in emerging markets than – historically at least – developed markets. He talks about the NAFTA trade deal and the Mexican peso gyrates. A seemingly offhand remark about a company can send its market value down by hundreds of millions of dollars.
Earlier in the year, I suggested that if U.S. markets were to act more like emerging markets, they could be in for a fall. That’s because emerging markets historically trade at lower valuations (like the price-to-earnings ratio) than developed markets. So in order to adjust to a lower (closer to emerging market levels, that is) P/E ratio, either earnings would have to fall, or prices – of shares, that is, overall – would have to fall.
Does political uncertainty matter for U.S. markets?
That hasn’t happened (yet, at least). This is partly because the broad policy outlines sketched by President Trump – few of which have come to fruition yet – are seen as pro-growth and market friendly. Infrastructure investment, tax cuts, and taking an axe to regulation perceived as anti-business are all ingredients for a bubbly stock market, at least in the short term.
So far, this has outweighed the greater political uncertainty of President Trump. The S&P 500 has risen a bit more than 6 percent since the U.S. election in November. It’s up almost 7 percent in 2017 so far.
The U.S. market isn’t the only one where uncertain and volatile domestic politics are not hurting (and perhaps even helping) stock market returns.
South Korea is up
South Korea has a nightmare neighbour to its North. Though a war of anything other than words is unlikely, you might think that investors in South Korea’s stock market might sell just in case. What’s more, the country’s president was recently impeached and ousted, and citizens go to the polls for presidential elections on May 9.
Meanwhile… South Korea’s Kospi Index recently hit six-year highs. It’s up 17 percent in U.S. dollar terms in 2017 so far. The won, Korea’s currency, is up almost 7 percent against the U.S. dollar.
So is Turkey
Turkey’s president Recep Tayyip Erdogan recently won a referendum that grants his office significantly expanded powers. Even before the polarising referendum, Turkey was headed in a dangerous direction, by western democratic standards. “Erdogan’s thirst for one-man rule threatens Turkey,” warned a mid-March opinion piece in the Financial Times.
A few days ago the government moved to restrict television dating shows and it blocked access to Wikipedia, as part of a crackdown on the media and internet. By western liberal standards, Turkey is going to the dark side.
So how is the Turkish stock market doing? It’s up 21 percent in U.S. dollar terms in 2017 so far. The country’s currency is roughly flat.
What does it mean?
Trump’s market-friendly policy announcements – even if they’re getting bogged down in execution – are moving markets more than the president’s muddled delivery and his trigger-happy Twitter fingers. The anticipation of a strong economy can mean a lot more than political uncertainty.
Also, what bothers journalists doesn’t necessarily bother investors. The president of the Philippines – like his colleague in Turkey – has become a poster child for stomping on human rights. But the country’s stock market is up 12 percent this year.
And don’t forget… it’s all about your time frame. How markets view a policy or a politician changes over time. Today’s contrarian view is tomorrow’s consensus view. Measures or words that bolster markets now may be a slow-burn fuse that blows them up months later.
Until not long ago, U.S. President Donald Trump was intent on waging a currency war with China. Now… he’s not.
What changed? Let me explain.
A month or so ago I killed a couple of hours on a rainy Sunday afternoon by taking my kids to see the new Batman Lego movie. As the movie finished, while the kids were rummaging around under their seats for misplaced/dropped shoes and water bottles, a familiar name in the closing film credits caught my eye – Executive Producer, Steven Mnuchin.
It’s not a common name, so I did a quick check on my phone – yes, this was the Steve Mnuchin, long-time friend of Donald Trump and the same Steve Mnuchin who, when he’s not producing movies about plastic objects coming to life to save the world, has a day job as U.S. Secretary of the Treasury.
As for the Lego movie, it was entertaining and I laughed out loud.
US-China currency war – who would win? Read: Three ways China wins under U.S. President Trump
I had exactly the same reaction this past Sunday morning over breakfast as I read through a recent report from Mnuchin’s Treasury Department.
The report was a summary of Foreign Exchange Policies of major U.S. trading partners. It’s a regular brief to Congress (the U.S. national legislative body) which reviews exchange rate policies from global U.S. trading partners. It provides an update on which countries are engaged in unfair practices or are outright manipulating their currencies.
The Treasury monitors three specific criteria that a trading partner must trigger to potentially incur further enforcement i.e. being “labelled” a currency manipulator.
The three criteria are:
If these three criteria are triggered by China, then the Treasury is mandated to spend a year trying to resolve the issue through negotiations with Chinese counterparts. And if those steps fail then there can be retaliatory measures such as stopping U.S. government development agencies from financing programs in China – although these have already been halted for years anyway after the 1989 Tiananmen square crackdown.
The “labelling” of China as a manipulator is more of a risk factor in its ability to further weaken Sino-U.S. relations through uncertainty – we don’t know how China would react. What would a war with China and its currency, the renminbi, look like?
What we do know, or at least what we thought we knew, was Donald Trump’s view on the matter. He has consistently attacked China’s “devastating currency manipulation”.
Trump realizes a currency war with China is not a good idea
This is why Steve Mnuchin’s Treasury Report is so interesting. So what did the Lego movie master decide?
To save you the suspense, the Treasury Department gets straight to the point (on the first page in fact) and states the following:
Treasury has found in this Report that no major trading partner met all three criteria for the current reporting period. Similarly, based on the analysis in this Report, Treasury also concludes that no major trading partner of the United States met the standards identified in Section 3004 of the Omnibus Trade and Competitiveness Act of 1988 (the “1988 Act”) for currency manipulation in the second half of 2016.
So to be clear, Donald Trump’s Treasury Department has confirmed what we’ve been saying all along (below is an excerpt from January’s edition of The Churchouse Letter)
“It’s pretty hard to argue that China is guilty of anything here…
Pressure on the renminbi is not being engineered by the central bank. It is a by-product of an increasingly open Chinese capital account and the desire for individuals and companies to invest (or simply take money) offshore.
There is genuine demand for capital outflow which necessitates selling renminbi.
If anything, China is trying to stem capital outflow in a bid to soften the pace of depreciation!
Bear in mind, these capital outflows are both expected and long overdue. We wrote about this particular phenomenon nearly two years ago in ‘A $35 Trillion Dollar Bonanza’.”
But what I found so amusing in this report was the new additional language that Trump’s Treasury has now inserted. I immediately recognised the new text because I’d read the October 2016 report.
I’ve highlighted the significant additions in yellow below.
The first highlighted section complains that although the renminbi did appreciate against the dollar, China didn’t let its currency appreciate fast enough from its initial “deep undervaluation”. As a result (according to this line of argument), this caused significant and long-lasting hardship to American workers and companies. Sadly, however, the report doesn’t reference any supporting evidence of this hypothesis.
The second highlighted section finally acknowledges that China’s “recent intervention in foreign exchange markets has sought to prevent a rapid RMB depreciation that would have negative consequences for the United States…”.
So, according to the Treasury, first China damaged American workers and companies by not letting its currency appreciate fast enough… but now China is not only preventing depreciation, but that depreciation would also have “negative consequences for the United States”.
So now the U.S. is grateful China is intervening in its currency market because if it didn’t, the renminbi would depreciate faster!
It seems clear now why the Chinese haven’t taken this threat of labelling them as a “currency manipulator” terribly seriously.
But the Treasury saves the best ‘till last:
“China will need to demonstrate that its lack of intervention to resist appreciation over the last three years represents a durable policy shift by letting the RMB rise with market forces once appreciation pressures resume.”
“Lack of intervention to resist appreciation over the last three years”? There’s been no ‘appreciation’ pressure to resist!
See the chart below of the renminbi against the dollar over the past three years.
Go ahead, try and defuse that logic bomb.
China has spent the past three years fighting depreciation, not appreciation. The renminbi is down 14 percent against the dollar and it would be down a heck of a lot further had the People’s Bank of China (PBOC) not spent a trillion dollars in foreign currency reserves since early 2014 trying to defend it.
So, the first half of that sentence makes no sense.
But Trump’s renminbi capitulation comes in the second half where it says, “letting the RMB rise with market forces once appreciation pressures resume”.
This puts the entire “China currency manipulator” argument on ice for the foreseeable future. The Treasury has effectively just asked China to keep doing what they’re doing (that is, to resist further renminbi weakness), but to let the currency re-appreciate when the times comes. That could be five years away.
It’s hard to know what triggered this dramatic change of course by the Trump administration on the renminbi. The White House simply remarked that “circumstances change”, and Trump himself said, “Why would I call China a currency manipulator when they are working with us on the North Korean problem?”
Regardless of why the White House has completely backtracked on this issue, it does remove a potential negative overhang on Sino-U.S. relations.
It also affords us more certainty and stability with regard to our view on investing in China. Here’s one of the best ways to invest in China according to my colleague, Kim.
Canapés and missile strikes, but no Big Macs
“I would not be throwing him [Xi Jinping] a dinner. I would get him a McDonald’s hamburger and say we’ve got to get down to work because you can’t continue to devalue [the renminbi]… I would give him a very — yeah, but I would give him a double, probably a double-size Big Mac.”
Donald Trump, August 2016
At the President’s Mar-A-Lago resort last Thursday evening Donald Trump and Xi Jinping dined on Caesar salad, Dover sole and New York strip steaks, paired with a 2014 Girard Cabernet Sauvignon, a wine which one reviewer on wine website Vivino describes as tasting “like a swamp in a good way”.
Big Macs were conspicuously absent from the menu.
But midway through dinner, Trump informed his counterpart that he had launched 59 Tomahawk missiles at a Syrian airfield in response to Syria’s use of nerve gas against civilians two days earlier.
With no congressional approval, and Trump’s statement ahead of the meeting that “If China is not going to solve North Korea, we will”, the message was clear: Despite the Floridian diplomatic niceties, China should expect the unexpected from Donald Trump.
In reality, the Syria strike completely overshadowed the summit between the two leaders.
In my previous note on the subject last week I said:
“I expect there to be no grand bargain on issues of that magnitude because there are no quick and obvious solutions in sight that are palatable to both Trump and Xi.
Rather, I think we can expect to see Xi Jinping come bearing some economic gifts for Trump, preferably something that Trump can boast about in 140 characters or less.
My hope is that Trump will take the opportunity to appear ‘presidential’. Xi Jinping is a measured, calm individual and if Trump can come across as a businessman who’s ready to do deals (an aspect about Trump that the Chinese actually respect) then the summit will provide an opportunity to reset relations.”
We certainly didn’t get any grand bargains on the likes of North Korea, South China Sea militarization, or the renminbi. There were no formal conclusions or even a press conference attended by both leaders.
However, Xi and his team did bring some of those tweetable gifts for Donald Trump. Officials involved in the Mar-A-Lago talks discussed China’s willingness to end a ban on U.S. beef imports into China (in place since 2003) along with allowing U.S. companies increased China financial sector market access.
On the relationship front, the two leaders appeared to establish a rapport, with Xi saying they had built a “good working relationship”, and Donald Trump’s assessment that “tremendous goodwill and friendship was formed”. Trump has also accepted an invitation from Xi to visit China later in the year.
From a Chinese perspective, this was a successful trip.
There were no diplomatic fumbles, so no problems for Xi Jinping to be portrayed strongly in the Chinese media. A photo from Chinese news agency Xinhua widely circulated across mainland China shows a poised and confident Xi Jinping, with his more relaxed and perhaps less commanding American counterpart leaning back on the sofa.
It’s hard to overstate just how seriously this kind of imagery is taken by the Chinese. Projection of power is extremely important when it comes to these visuals.
Take a look at this recent photograph of Xi Jinping with Philippine President Rodrigo Duterte. Xi standing over Duterte, who appears hunched, dishevelled and diminutive. There’s no doubting who’s in charge.
As Xi said of the summit “We had long and in-depth communication. And, more importantly, we have further built up understanding and established a kind of trust, and we have initially built up a working relationship and friendship.’’
The two leaders also agreed on a new 100-day plan for trade talks with the aim of boosting U.S. exports and reducing the overall trade deficit with China which, as we’ve written before, is high on President Trump’s agenda.
But we take such ‘plans’ with a huge pinch of salt, and you should too. Substantial trade deals take years, not months. And we still fully expect that Trump and his team will continue to throw jabs in China’s direction. As the President himself tweeted on Saturday: “goodwill and friendship was formed, but only time will tell on trade.”
Overall though the lack of visible controversy or open conflict between the two leaders paved the way for the first step of a much-needed ‘reset’ for their relationship. This can only be a positive for Chinese stocks.
P.S. Our special report on Chinese stocks “Unlocking China’s Hidden Trillion-Dollar Opportunity” is available for free to Asia Wealth Investment Daily subscribers. Click here to get your copy.
China’s President Xi Jinping arrives on U.S. President Donald Trump’s home turf tomorrow for a hugely anticipated showdown between the leader of the world’s hegemon and its principal rising power.
Don’t expect to see the pair hit the golf course. The sport is generally viewed as a symbol of indulgent corruption in China and all but banned for the 90-odd million Communist Party members.
Trump rode a fierce anti-China narrative all the way to his electoral victory last year. He threatened to label China a “currency manipulator” on his first day in office and implement tariffs of up to 45 percent on Chinese imports. Since he took office the relationship hasn’t improved.
It got off to a chilly start after he took a phone call from Taiwan’s President Tsai Ing-wen. The act of taking the call, referring to her publicly as the ‘President’ of Taiwan, and then suggesting that China’s bedrock “One China” policy – which decrees Taiwan to be an inalienable part of China – was a chip on the table for negotiations offended Beijing greatly. In their eyes, it constituted a direct attempt to undermine Chinese sovereignty.
Did Trump play his cards wrong?
Whilst nobody knows for sure whether this represented a highly calculated tactical manoeuvre on Trump’s part, or just bone-headed ignorance, China responded as we predicted.
In the January edition of The Churchouse Letter, “Asia in a Trumped-Up World”, we wrote:
“By calling this bedrock assumption of one China… Trump is establishing a marker that he can ‘back down’ from in return for economic concessions.
Before we move on to what these concessions might be, it’s worth re-emphasising just how important “One China” is to the Chinese. The last time it was actively threatened was in 1995 when Bill Clinton granted a U.S. visa for Taiwan’s President to attend a University alumni reunion. Beijing threatened retaliatory measures against U.S. business in China, or even offering nuclear cooperation with Iran.
You can guarantee that Beijing will be readying exactly the same inventory of potential ‘pressure points’ they believe that Trump will respond to. These could include North Korea, military exercises around Taiwan, further militarisation of the South China Sea…
You can also bet your bottom dollar that President Xi Jinping isn’t going to be in the mood to offer anything in return for Trump’s attempt to rattle the hornet’s nest…
And Xi wasn’t in the mood to offer anything.
Ultimately, it was Trump who backed down in the face of radio silence by the Chinese by committing to “One China” in his first phone call with Xi Jinping after taking office.
Trump has recently attempted to ratchet up the geopolitical pressure back on China in the lead up to the meeting.
North Korea is a perennial thorn in both countries’ sides. Trump said in a recent interview that “if China is not going to solve North Korea, we will. That is all I am telling you”.
The deputy White House national security adviser KT Macfarland is quoted as saying “There is a real possibility that North Korea will be able to hit the US with a nuclear-armed missile by the end of the first Trump term.” This is an unacceptable potential threat from a nation led by a man who’s unpredictability makes Trump look like a beacon of statesmanlike stability.
China keeps the North Korean regime afloat with exports of fuel and commodities, providing up to 90 percent of the country’s energy supplies.
But North Korea also acts as a buffer between China and South Korea, where the U.S. has deployed military assets, specifically the Terminal High Altitude Area Defence systems (or THAAD), designed to shoot down short, medium, and intermediate range ballistic missiles.
Beijing is unhappy with THAAD for the surveillance benefits it brings to the Americans, particularly with regard to improving early tracking on Chinese missiles and the fact that its radar penetrates deep into Chinese territory.
There are other geopolitical hot button issues beyond North Korea and Taiwan. China’s militarization of the South China Sea is another one. But I expect there to be no grand bargain on issues of that magnitude because there are no quick and obvious solutions in sight that are palatable to both Trump and Xi.
Rather, I think we can expect to see Xi Jinping come bearing some economic gifts for Trump, preferably something that Trump can boast about in 140 characters or less. Xi will no doubt be acutely aware of Trump’s limited successes in office so far and his historically low polling numbers. Trump needs a ‘win’.
According to Chinese news agency Xinhua, during Xi’s February call to Trump, he communicated that “China is ready to boost mutually beneficial co-operation with the United States in various fields such as trade and economy, investment, science and technology, energy, culture and infrastructure”.
Last year China invested around US$45 billion in the U.S. When he meets with Trump, Xi may take the opportunity to announce a few more job-creating investments.
Although Xi arrives at this summit with significantly more political stability and momentum than his counterpart (the “grown-up in the room” as my colleague Kim Iskyan puts it), we have no idea how Trump will behave.
He has to make some noise about trade, given the US$347 billion 2016 trade deficit the U.S. ran with China, as we’ve written about before. But when it comes to the currency he doesn’t have a leg to stand on given that China is trying to slow depreciation of the renminbi.
Which Donald will show up?
Will he be needlessly confrontational, looking to pick a fight? Will he be tweeting in between meetings? Will he have figured out how to properly shake hands with world leaders yet?
Bear in mind his key advisors are far more confrontational on China than he is. Early last year his Chief Strategist Steve Bannon said “We’re going to war in the South China Sea in five to 10 years… There’s no doubt about that. They’re taking their sandbars and making basically stationary aircraft carriers and putting missiles on those.”
My hope is that Trump will take the opportunity to appear ‘Presidential’. Xi Jinping is a measured, calm individual and if Trump can come across as a businessman who’s ready to do deals (an aspect about Trump that the Chinese actually respect) then the summit will provide an opportunity to reset relations.
But make no mistake, this is only the beginning of a four-year Trump-China saga and how well or poorly this summit goes will have profound implications on the relationship between the two largest global economies.
In October 2008, in the throes of the global economic crisis, legendary investor Warren Buffett famously wrote: “Be greedy when everyone is fearful, and fearful when everyone is greedy.” Over the course of his career, he has made a fortune from this contrarian philosophy of going against the herd.
If he’s right, it might be time to be fearful. Why? Because the stock market “fear index” is at its lowest level since 2007. Those who saw this, foresaw the stock market crash, in fact the global economic crisis, which was coming. (Here are 5 things to do before any crisis hits.)
How to measure fear
The “fear index” is another name for the VIX index, which is a measure of anticipated market volatility.
It’s based on option prices of individual stocks in the U.S. S&P 500 index. When investors expect more price fluctuation (that is, for prices to bounce around more), the VIX goes up. And volatility is greatest when markets fall.
As the old saying goes: The market takes the stairs up, and the elevator down.
Quoted as a percentage, the VIX is currently around 11. That generally means the market expects an 11 percent range of movement in the S&P 500 index over the next 30 days. For comparison, the VIX hit an all-time high of 89.53 on October 24, 2008, in the depths of the global economic crisis.
The VIX rises when investors are surprised and scared. Investors panic-buy options to protect against further losses. As a result, implied volatility increases.
(One estimate suggests that if the VIX had existed in 1987 – it was instituted in 1993 – it would have hit 120 during the October 1987 stock market crash in the U.S.)
So the VIX index is a measure of how anxious large investors in the S&P 500 are to insure their portfolios. Put options – which increase in value when the underlying security goes down – are widely used by institutions as insurance against losses in the stocks they own. When investors fear a market decline, put options are increasingly in demand, so the price of put “protection” rises.
Generally speaking, the VIX goes up during times of uncertainty and fear, and goes down when investors are complacent or greedy.
The lowest VIX reading ever recorded was 9.39 on December 15, 2006. In recent days, the index has dipped under 11. According to investment bank Goldman Sachs, since its inception, the VIX index has traded below 11 on only 1.8 percent of trading days (grey lines on chart below).
In recent years, there have been some short-lived declines in the S&P 500 and spikes in the VIX. In August 2015, for example, the S&P 500 dropped 11 percent in a little more than a week, causing the VIX to briefly peak above 50. And in the beginning days of 2016 the VIX surged to more than 30.
But the stock market hasn’t seen elevated volatility since 2011. And, based on current VIX readings, investors don’t expect much volatility.
Right now, investors fear little
One thing is for certain – global stocks have been on a roll. The S&P 500 is up 9.8 percent since the election, and global indices aren’t far behind. The so-called “Trump Rally,” which we expect to end, is based on expectations of higher corporate profits from the new U.S. president’s pro-growth policies. Trump has proposed slashing corporate income taxes from 35 percent to 15 percent, and eliminating many regulations in financial, energy and other industries. (We previously wrote about the industries that will do well under a Trump administration… here.)
Is there a stock market crash coming anytime soon?
Does a low VIX reading point toward an imminent market top? Not necessarily. The rock-bottom VIX only indicates that optimism and complacency are high among the largest investors in the S&P 500 index. This attitude could continue for a while, but it’s a warning (re-read the Buffett quotation at the beginning of this piece).
While rising prices may have already priced-in Trump policy benefits, the implementation of these policies is by no means a certainty. Also, the U.S. Federal Reserve has indicated that it expects to continue to raise interest rates – which will counter President Trump’s expected economic stimulus plans. The more that risk assets (like stocks) rally, the more aggressive the Fed is likely to be in raising rates. After nearly seven years of near-zero rates, tighter monetary policy will be a big challenge to global markets.
This is a difficult mix. The timing is difficult, but the low VIX suggests that the U.S. and global markets might be primed for a correction.
That doesn’t mean it’s time to panic… it just means that you should be careful and selective. Just because the market is complacent, it doesn’t mean you should be.
Keep watching your stop-loss levels carefully, and keep an eye on the VIX index.
How else should you protect your portfolio? I’ll write about that next week.
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