SINGAPORE (Dec 20): The US and China two weeks ago reached an agreement on a “phase one” trade deal, which is slated to be signed in January after legal review and translation. Markets heaved a collective sigh of relief.

US negotiators have called the deal “remarkable” in scope, though parsing through various news reports, we were hard-pressed to find any new, concrete Chinese concessions from when negotiations fell apart in May. We could be wrong — actual details on the trade deal are scarce — but we don’t think we are.

Yes, things would have been worse if not for this deal. Both countries have agreed to hold off on additional tariffs that would have gone into effect on Dec 15 and undertake a partial, limited reduction on existing tariffs. But neither the US nor China is better off today than before the trade dispute began.

In fact, observers have pointed out that the big sticking points such as structural reforms in intellectual property protection, forced technology transfers and state subsidies are not clearly defined. China also appears vague on the actual amount of agricultural purchases it will make. In contrast, US President Donald Trump has promised this will hit US$50 billion ($67.8 billion) a year, an amount that some contend is not realistic.

So why did Trump agree to sign off on such a “skinny” deal? It does not seem like the limited concession gains from China can even begin to offset the costs exacted by the whole trade saga.

Trump has, thus far, very effectively weaponised trade, and used it to build his voter base. The threat of tariffs is a huge stick when you are the biggest consumer market in the world. But it has its limits. Once imposed and all parties have suffered — whether the additional costs are passed on or absorbed, and the resulting uncertainties have caused disruptions to production and investments — there is little left to be gained (or lost). Beyond this, therefore, tariffs no longer work.

Trump knows this. The US economy has been resilient, held up by consumer spending. But the December tariffs, if levied, will hurt consumers the most. Plus, consumption as the lone economic growth driver is not sustainable in the long term. Without fresh investments, productivity will suffer, as will corporate profits and eventually, jobs, wages and consumption. A weakening economy would be untenable in an election year.

Herein lies the great disadvantage of a democratic system where the president is elected every four years, versus one where there is no term limit.

If you recall, we wrote about this subject sometime back (see flashback). China wants a trade deal and its economy will definitely benefit from one — but on mutually agreeable terms and as equal partners. If not, it will ride out the consequences. China is prepared to, and can, withstand the hardship.

Flashback: Our story on the China-US trade war, published on August 26, 2019

I remember, as a schoolboy back in 1971, our school rented TVs and allowed the students to watch the “Fight of the Century”, the heavyweight championship match between the two greatest boxers then, Muhammad Ali and Joe Frazier.

The boxer who floated like a butterfly and stung like a bee, with a longer reach and bigger punch, lost to the boxer who took his own pain with a grin. What is the relevance, you ask? Well, it is not always about who packs the biggest punch but often, the winner is the one who can take the most pain (unless you get to knock out your opponent with the first punch). This analogy applies both in and out of the ring.

That said, China will allow Trump to declare victory, even on bloated claims, as the leadership does not have to answer to popular opinion or western narratives.

Investors will cheer the trade deal, which we suspect will calm tensions through 2020. It will remove uncertainties, to a certain extent, and encourage businesses to resume investments. Confidence will improve. Coupled with UK Prime Minister Boris Johnson’s landslide election win and mandate for a speedy Brexit in January 2020, the outlook for global equities has, without doubt, brightened.

This will be the narrative going into the new year, one we have articulated over the last few months, which also justifies our aggressive positioning for the Global Portfolio. There was never any doubt in our minds that the US would come to a trade settlement with China. The pain would, otherwise, have been too hard to bear for the US. We have therefore been fully invested for the Global Portfolio.

The portfolio closed 1.1% higher for the week ended Thursday, in line with broader market gains. The Standard & Poor’s 500 and Dow Jones Industrial Average hit fresh all-time record highs. 

Total returns for the Global Portfolio were boosted to 17.4% in the two years since inception. The portfolio is outperforming the MSCI World Net Return Index, which is up 15.3% over the same period.

Shares for Adobe surged 6.8% last week after its latest fiscal fourth-quarter results beat market expectations. All of the company’s cloud computing business segments reported strong growth momentum. The digitalisation secular trend is only starting to take off and has years of growth ahead.

On the other hand, shares for The Boeing Co fell sharply. Despite earlier optimism that the 737 MAX would be able to return to service by 1Q2020, management has now confirmed that production of the plane will be temporarily halted in January. It did not specify how long the factory closure would last. 

Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore.
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