The Daily Update - Trump in Asia

A year ago the world woke up to the certain prospect of Trump as the 45th President of the United States. Since then, as the Independent put it, he has made “2,470 tweets and 0 major legislative achievements”. He has also made 13 trips to foreign countries and at least 34 trips to his favoured destination: the golf course.

President Trump has this week been on his latest trip, sweet-talking his way through Asia and has turned from recent meetings and negotiations with Japan and South Korea to focus now on China. Yesterday in Beijing the Trumps met Chinese President Xi Jinping and today they meet Premier Li Keqiang. Tomorrow they go on to Vietnam and then to the Philippines: all in one week (the trip 11 days in total).

Big on the agenda are US-Sino corporate deals and the problem neighbour of North Korea. But although Trump will no doubt continue to flatter recently re-elected President Xi and avoid contentious issues, such as meeting human rights groups, there remains little scope for real advancement on any of these issues. $10bn or so in corporate deals will have little impact on the $350bn annual US trade deficit.

Having withdrawn from the Trans-Pacific Partnership (TPP) on his first day, Trump must be increasingly realising that he cannot strong-arm China on trade issues. Protectionism will most likely have damaging results, as although China is the largest global exporter it is also the second largest importer, and it easily has the potential to become the largest importer within the next few years. Given China’s recent announcements and commitment to boost the wealth and living standards of the broader population and their 30-year plan to become the largest and dominant global superpower, no multinationals want to be locked out from such potentially lucrative opportunities. Xi last month went as far as to say, “By 2050 China will become a global leader in terms of comprehensive national strength and international influence with the rule of law, innovative companies, a clean environment, an expanding middle class, adequate public transportation and reduced disparities between urban and rural areas.”

Perhaps then, a better approach to reduce such a trade deficit is to keep encouraging and supporting Chinese aspirations of investment, trade and tax reforms; further mutual opening of markets, trade and investment; and seek to cooperate with China during this dynamic and opportune phase. As much for the economic benefit of the US as for China, we hope that these are the outcomes of Trump’s meeting with Xi and Li: or at least no obtuse remarks or tweets to their detriment (especially now as the length of possible tweets has doubled to 240 characters and so some may find restraint twice as difficult).

China’s bond market still remains underweight in indices and thus also in many investors’ exposure. As this is slowly changing, the $9tn Chinese bond market should have a positive bias to performance as such securities become more mainstream and more generally sought. There are a number of large investment grade Chinese credits we have favoured and that still offer relative value according to our models. Many of these have performed well throughout the year thus far and have contributed to performance and low volatility but still offer atypically higher yields. Our favoured Chinese credits offer greater compensation for strong and highly rated issuers and often are integral quasi-sovereigns, and look priced to account for the generalised risks in Chinese debt without fully accounting for individual credit strengths and these aspects of national positive momentum. These trade at wider spreads compared to a global universe where one would typically have to stretch to weaker and unsupported credits from countries with weaker net creditor positions to obtain like yields. Take Sinopec for example; it is state-owned and the second largest global oil company by revenue. One of their bonds maturing in 2023, with a duration of 5 years, has returned 6.2% year to date and still offers a yield of 3%, or spread of 94bps when fair spread for like duration and rating is just 56bps. According to our models this makes the A1 rated bond 2 notches cheap and trades in line with typical A3 rated bonds. This still offers relative value versus our bond universe but because of its resilience is beginning to be less attractively priced compared to other opportunities we can find.

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