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What Investments Will Benefit from the Phase One Trade Deal?

With much hullabaloo the White House announced the completion of a Phase One trade deal with China. The Chinese negotiators in Beijing are said to be ecstatic and even incredulous at how they believe the Americans caved in on previous “rock solid” negotiating positions. But, stocks rallied a bit and many investors are happy. The question now is what investments will benefit from the phase one trade deal, how secure these benefits will be, and how long they will last. The Chinese have a long history of promising things in regard to world trade and a long history of now following through. That is our first concern. The second is that this deal does not seem to move toward freer trade but toward increasingly managed trade! Again, what investments will benefit?

Trade Deal Increases Rather Than Removes Barriers to Investment and Trade

The New York Times notes that Trump’s trade deals tend to increase rather than remove trade barriers.

Mr. Trump’s new trade deal with China promises to lower some of the walls Beijing has erected for foreign companies – including opening its financial markets, streamlining imports of American agriculture and offering greater protection for intellectual property.

But it leaves in place tariffs on the bulk of Chinese imports – more than $360 billion worth of goods. And it requires voluminous Chinese purchases of American products – $200 billion of additional sales over the next two years, according to the Trump administration – a significant shift that experts say moves trade policy away from promoting free markets and back toward an earlier era of managed trade.

It turns out that Trump does not trust free trade. He trusts when he can make deals on and believes he has the leverage to control. This is the same approach as the Chinese Communist Party takes on managing their economy from the top down and dispensing favors to those well-placed by politics or family. That approach is causing problems for China and goes against the long term efforts of the US and EU to get China to open up and quit controlling all aspects of their economy to the exclusion of foreigners.

How to Benefit from the Phase One Trade Deal

Because this is a “controlled” deal, you need to look at who is specifically favored and if those “favors” are likely to come to be and likely to last.

Will Chinese Tech Stocks Benefit from a Trade Deal?

Interestingly, there are a number of Chinese stocks that will benefit, according to Morgan Stanley!

Morgan Stanley has flagged 29 Chinese stocks that are most likely to benefit from the completion of a phase one deal between the U.S. and China.

Nearly half of them are from the information technology sector, which has been hit by the trade war as those companies have been on tariff lists. Eight are from the consumer sector.

“These two sectors saw the biggest scale of valuation re-rating based on their previous reaction to de-escalation events,” Morgan Stanley said in a report last week.

So, one way to benefit from the phase one trade deal may be to buy Chinese tech stocks.

Does US Agriculture Benefit from the Phase One Trade Deal?

According to reports, the phase one trade deal includes billions of dollars in agricultural purchases. We wrote a year ago how the trade war damaged investments in US agriculture. In that article, we noted how farmers in the state of North Dakota planted soybeans instead of wheat and other crops and how the support system of rail links, grain elevators, and other facilities were upgraded to sell massive amounts of soybeans to China. Then the Chinese cut off purchases in retaliation in the trade war and the strong dollar further hurt US agricultural exports.

The problem for US farmers and agricultural businesses is that they need foreign markets and they need reliable foreign markets. If the current deal becomes “re-negotiable” as they move into the next phase, this simply undercuts the farmers and the farm businesses again.

Trump’s Rationale for Investment and Trade Negotiations

The president does not believe in free trade. His rationale is that the Chinese will never abide by any deal that does not benefit them or which they need to follow to avoid economic pain. As such, the US is giving up efforts of US administrations going back to Nixon to get China to open up and join the rest of the world on a fair basis. Every trade deal going forward will be tit for tat and controlled by what the Chinese are willing to do in return for what they want.

So, what investments will benefit from the phase one trade deal? You will need to pay attention as the ongoing trade war saga plays out to be able to benefit by picking the right investments but don’t plan on any of these being investments that let you sleep soundly at night!





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