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The long awaited phase one trade deal between the U.S. and China is due to be signed on Wednesday, but the uncertainty may still linger.
Joseph Little, global chief strategist for HSBC Global Asset Management with about $500 billion of assets under management, told MarketWatch the tensions around trade aren’t fully resolved. “There are still concerns about the macro outlook, about the structure internationally with the U.S. still challenging the nominations for the World Trade Organization,” he said. “The [trade] environment remains very much in flux and a source of concern and challenge for investors.”
That uncertainty—not just in trade but across politics, the economy and the environment—is likely to limit returns across assets. “I think it’s hard to get very confident that we’re going to see a significant, strong synchronized global phase of expansion, and equally in investment markets, I think it’s hard to get very positive that we’re going to see a very strong phase of market returns.”
That said, Little isn’t a bear and says U.S. stocks can return 6% or 7% this year. He doesn’t put much emphasis on data showing price-to-equity ratios are elevated. “I’m an asset allocator, the critical question is how the opportunity set looks today, not how equity markets are trading relative to how they’ve been trading in the past,” he says. “If you’re being offered a relative return 4% to 5% above what you can get in core fixed-income asset classes, I think at this stage of the cycle, given the macro trends that we have seen and the profit trends that we’re seeing, that’s not too bad.”
Outside the U.S., he notes some improvement in the manufacturing and trade data, which should also help U.S. multinationals. Overseas, HSBC sees opportunities in what he calls North Asia—China, Korea, Taiwan and Japan. He said a road trip to Asia found investors there cautious, “but the relative valuations look pretty good.”
Aside from some opportunities in Asia, Little is more cautious on fixed income after the strong returns of the last two years. “That’s the big challenge because that really damages the valuation position of many of the assets in the fixed-income space.” He said inflation is a “neglected risk,” even though he also acknowledges the current data doesn’t show price pressure. “I don’t think it takes very much to create the narrative of inflation in investment markets,” he said. “The big challenge to investment markets and how the system is set at the moment is the emergence of inflation and rising government bond yields.”
On commodities, Little says HSBC is “skeptical” on gold GC00, +0.53%, calling it unreliable as a hedge, but it is bullish on oil CL.1, +0.21%. With backwardation in the market—the spot price being higher than the futures market—there is a valuation support for oil, and energy prices also could benefit due to their greater sensitivity to the broader economy.
The buzz
The White House has scheduled the signing ceremony for the China trade deal for 11:30 a.m. Eastern. The text of the agreement will be heavily scrutinized and is expected to be released on Wednesday.
More earnings are on the way after well-received JPMorgan Chase and Citi results on Tuesday. Bank of America BAC, +0.74% and Goldman Sachs GS, +0.18% are among the big names investors are waiting to hear from. Insurance giant UnitedHealth UNH, +0.84% on Wednesday morning reported earnings ahead of forecast, while retailer Target TGT, +1.12% said holiday-season sales missed its expectations.
The economics calendar includes data on producer prices, a New York-area manufacturing gauge and the release of the Federal Reserve Board’s Beige Book of anecdotes on the economy.
The markets
After the Dow DJIA, +0.11% closed on Tuesday at its second-highest level ever, U.S. stock futures ES00, -0.04% were a touch weaker.
Gold futures GC00, +0.53% rose over $8 an ounce, and the yield on the 10-year Treasury TMUBMUSD10Y, -1.25% rose 3 basis points.
Asian stocks ADOW, -0.48% generally were weaker, while European SXXP, -0.05% stocks were mixed.
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