Why investors shouldn't fret too much about US-China trade war

May 15, 2019 10:27
Escalation of the trade war between the US and China might just prove to be short-term noise,  a market watcher argues. Photo: Reuters

The US and China markets have both seen long-awaited corrections following an escalation of the trade war between the world's two largest economies. Hong Kong stocks, too, faced some rough weather.

While pessimists seem to be correct at the moment, it’s typically the optimists who really make money.

The fact is, global equity markets have kept hitting new highs after going through one crisis after another.

The escalating trade war might just be some short-term noise over the long course of history.

In general, asset prices have skyrocketed over the years. Those in the optimistic camp are eventually winners.

If we look back, those who have bought property during 2003 SARS outbreak, bought shares during market crises, reaped huge returns.

Meanwhile, it's important to remember that individual stocks and the overall market index can move in opposite directions. Buying stocks is not entirely about betting on the economy.

Great companies stand out during economic downturns. These firms are often able to take advantage of the downturn to expand their market share. And it’s precisely during market sell-off that investors can find some real bargains.

We should also remember that fundamentally stock prices reflect projections about company earnings and monetary policy.

While the US and China markets plunged last year, it's worth bearing in mind that apart from the trade war issue, there was another important factor that played a role -- monetary policy tightening by the central banks in the two nations.

The Hang Seng Index bottomed out in October last year, which coincided with Beijing’s monetary policy shift in the third quarter. The Federal Reserve also changed its course at the end of last year, which helped US equities bottom out.

As both central banks seem to be ready to ease if there is a need, investors should not worry too much.

US tech firms have posted better-than-expected earnings in the first quarter. In China, consumer-related names are doing very well, especially those involved in businesses such as electronics, tourism and healthcare.

Investors should not be overwhelmed by the current market turbulence, and should instead use the correction as an opportunity to pick up select stocks.

This article appeared in the Hong Kong Economic Journal on May 10

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal