June Edition 01: What is the US-China trade deal telling us?
Each month, we discuss key issues facing investors. First, let’s look at the US – China trade deal.
Key takeaway: The quick US-China agreement and the US-UK trade deal have substantially reduced downside risks. As earnings growth expectations have been lowered and valuations are more fairly valued, we think the rotation away from US assets will ease. Coupled with AI-led innovation and other structural opportunities, we move global and US equities, as well as Technology, back to overweight while cutting Europe ex-UK equities to neutral. We continue to stay diversified through multi-asset strategies and gold to manage downside risks.
What is the US-China trade deal telling us?
The quick US-China agreement resulting in a 90-day reprieve on the eyewatering trade tariffs came as a surprise. This, together with the US-UK trade deal, has substantially reduced the tariff-related headline risks in the next few months.
These announcements illustrate to investors that policy changes can be surprising on both the positive and negative sides. From now until 9 July, we may see more trade deals, with India, South Korea and Japan potentially involved. Moreover, the US government is preparing a bill to implement tax cuts, which could lift market sentiment further.
Therefore, we think the rotation away from US assets will slow. Earnings growth expectations are already set lower at 11% for 2025, providing upside potential, while valuations are near multi-year averages. Coupled with the unabated AI-led innovation trend and other structural drivers, such as onshoring of jobs and re-industrialisation, we move global and US equities, as well as the technology sector there to overweight, and cut Europe ex-UK equities to neutral. The reduced tariff tensions are also a tailwind for Technology, which is backed by better-than-expected Q1 earnings growth and fairer valuations. As it will take some time to see the full impact of tariffs on the economy, market volatility will linger. We remain cautious and leverage multi-asset strategies to capture growth opportunities while mitigating downside risks and continue to use gold as a diversifier.
US stocks are still expensive vs other markets, but valuations are in line with the 5-year average
In the next edition, we will discuss whether bonds are losing their diversification appeal.
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