US China shares may have the least to gain

Either the beginnings of a breakthrough resolution in the U.S.-China trade conflict will be announced soon, or investors are about to be handed a big disappointment.

Likewise, global markets have varied scope to extend gains made in the first couple of months this year in the event of a positive outcome of talks, and differing room to absorb losses if a deal remains elusive.

• A limited formal agreement could emerge from a top-level summit at the end of the month with a focus on:
• The auto sector; including a speeded-up timetable for removing foreign-ownership limitations and reduced tariffs
• Stepped-up purchases of U.S. goods; possibly including $18bn  natural gas purchase
• But critical issues remain unresolved, chiefly:
• How China handles intellectual property and other industrial policy matters
• A dispute resolution plan
• Aside from the mooted date for Trump-Xi talks, there is no detailed timeline for further negotiations, underlining deep the uncertainty that remains
• Consequently, a series of deals , requiring many more months to complete is likely

Outlook for global shares mixed due to trade talks

• Meanwhile, China’s stock markets are outperforming most global regions so far this year (Shanghai/Shenzhen index is up 26%) raising the question of whether that can continue, despite anticipation of official stimulus
• Most major European and U.S. indices have managed to rise less than half the amount of their Chinese counterparts; some, like the FTSE even less
• Stock market forward valuations and earnings expectations should begin to exert an influence
• U.S. corporate earnings are forecast to rise just 5.3% vs. 2018’s 24.4%, according to FTSE Russell research, as the impact of a boost from tax changes fades
• European companies, excluding the UK, are expected to see profits rise 9.1%. A rise of 13.9% is forecast for emerging markets, according to MSCI
• Given that global corporate earnings expectations for the year are modest, a favourable trade talks outcome could yet provide more of a lasting boost for markets other than U.S. and China’s where ratings are relatively elevated