The US and Chinese currencies. Photo: Reuters/Jason Lee

The phase one deal between the world’s two largest economies could help de-escalate the trade conflict and boost market sentiment in the near term, but the strategic competition will likely persist in the years ahead, UBS Chief Investment Office (CIO) said in a report published on Monday.

“While they may never be best friends, we think self-interest dictates that a full-on cold war is also unlikely. A case in point – as growth deteriorates in both economies, the two sides finally agreed to sign the interim deal. Technology and finance are potentially the next focus of the conflict,” the report said, adding the Phase 1 trade deal lifts uncertainty and supports sentiment for Chinese equities.

“We favor tech hardware, e-commerce, consumer staples, real estate and banks, and remain cautious on energy and telecom.”

The research outfit said it was cautious on the energy sector given the challenging macro backdrop and oversupply that could lead to lower oil prices in 1H20. The caution on the telecom sector, in particular telecom operators, was driven by the planned substantial subsidies expected to be offered to consumers as 5G is rolled out.

But the rise in demand for 5G-related hardware and content would support China’s hardware and semiconductor supply chains and UBS CIO analysts noted their preference for suppliers with idiosyncratic stories relating to market share gains.

In sum, all this would drive the Chinese currency versus the US dollar during 2020, they said.

“We urge investors not to hedge their CNY long positions until USDCNY slips to 6.8 or below. 6.8. If Chinese economic data continues to be firm (like PMIs) and capital flows continue to chase reasonably valued assets (mainly equities) and better growth prospects in Asia (like China), a temporary move below 6.8 cannot be ruled out.”

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