As U.S.-China trade talks get underway, portfolio manager Steve Watson discusses his best, worst and likeliest scenarios for the two superpowers — and global investors.

 

 

Steve Watson

Equity Portfolio Manager

29 years of investment experience

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Matt Miller: So much going on right now in terms of the U.S.-China relationship, particularly on trade. As we sit here in early March, tensions seem to be rising, some related to the early discussion of steel capacity and the steel and aluminum tariffs, but also discussion of what may be a broader pushback by the administration on alleged Chinese mercantilist trade practices, etc. What's the right way for investors to think about this? How is it affecting your outlook?

Steve Watson: Well, we need to watch the situation really carefully. But for now, I think the main point I would make is that the Chinese really focus much more on action than on rhetoric. The steel tariffs don't actually affect our trade with China all that much. So China right now is taking up a sort of a wait-and-see attitude. They will decide, in time, how to respond to heightened tension. And let's hope we don't see this get out of hand. But for now, looks containable.

I think one thing that's worth remembering is that as we worry about limitations on the flow of physical goods around the world — and we should worry, because there is a danger of this getting out of hand — but the more important flows are in data and capital. Those are hard to restrict, really. So yes, we'll hope not to see a clampdown on the flow of physical goods around the world. We'll take some comfort in the fact that the really important stuff, data and money, will continue to flow.

Matt Miller: If we look down the road in a couple of months, and the administration does come forward with this so-called Section 301 investigation where at least the early rumors are that the President may brandish a piece of paper saying that China has stolen a trillion dollars over the last 10 years in intellectual property — if the administration does come forward, basically saying, "We want you to change some of your practices: the forced joint ventures with foreign partners, the massive subsidies of key industries, the theft of intellectual property” — what's your perception of what China's strategy will be?

Steve Watson: I suspect that the Chinese have been surprised in recent years that we haven't pushed back harder on some of these issues. My guess is — and it really is just a guess — they've been expecting this. And I think it would be appropriate for China — as its economy matures, as China develops its own intellectual capital that it will want to preserve — that China should make some reforms in this area. They should be more respectful of intellectual capital. I would like to think that China will be open to becoming a little more like other developed nations in this regard. So I hope there isn't severe pushback on their side, and let's hope that pragmatism reigns.

Matt Miller: One of the words that the current president likes to use — that even Emmanuel Macron and others have said — is they talk about more reciprocity in investment or in trade. And some of that may get applied to Chinese financial investment inbound to the United States. Even as, again, we sit here in early March, the question of a review now by the so-called CFIUS [Committee on Foreign Investment in the United States] board in the U.S. of the Broadcom proposed acquisition of Qualcomm is now going to be subject to some kind of national security review along these lines. Does that have implications for investors and how you're looking at things?

Steve Watson: I think it would be difficult to be against reciprocity as a concept. The problem is that one nation's idea of reciprocity is another nation's idea of a trade barrier. And there is a potential slippery slope here. Will this get out of hand? I'd like to think it won't. Are there legitimate concerns for national security that need to be considered when cross-border deals are being arranged? Yes, of course there are. Is it a risk that this turns out to be just a tit-for-tat game that has a potentially chilling impact on the world economy? We shall see. Again, I hope we don't go that far.

Matt Miller: We're a big investor in China. You're a big investor in China in your portfolio responsibilities. Does any of this current noise around the trade relationship affect your outlook, either positively or negatively, in terms of our overall positions on behalf of clients?

Steve Watson: It hasn't yet, Matt. I remain enthusiastic about China. China currently is growing at about 6.5%. We'll see that rate, presumably, dip a little bit. But it's worth keeping in mind that China had been growing at 10%, and we've see a cooling to this level, which I think is appropriate given the maturity that China has achieved in its economy. So no, I'm not yet worried that these tensions will have a significant impact on China overall. And I say, I think they will keep up a reasonable pace of growth, and I believe that we'll still find attractive investment opportunities in China.