Tactical Asset Allocation For July: Overweight Position In Bonds Versus Stocks


Recent increases in equity prices were driven in part by the expectations of a broad trade agreement between the U.S. and China. In fact, share prices of companies exposed to the Chinese market rose markedly since the end of May, over-performing the broad U.S. market index. We estimate that there could be double-digit potential gain to Chinese-exposed U.S. stocks relative to the entire universe of S&P500 companies if current tariffs are eventually reduced to zero.

However, the disappointing outcome of the recent G-20 meeting between U.S. President Donald Trump and Chinese President Jinping Xi has pushed forward the resolution of the trade dispute and thus the materialization of the above-mentioned potential gains. It will also do nothing to dissipate the worrisome economic uncertainty stemming from trade tensions. While there was an agreement by the U.S. not to impose 25% tariffs on the remaining US$300 billion worth of Chinese goods currently not taxed, the meeting fell short of our expectations as both sides merely agreed to resume negotiating. Nevertheless, core issues related to intellectual property rights and foreign investment remain stale. The permission granted to U.S. companies to resume selling technology equipment to Chinese telecom giant Huawei is positive and will certainly facilitate dialogue, but reports of pushback and pressure within the White House against that “concession” makes the issue unsettled at best.

In light of this, for July, we recommend a tactical overweight position in bonds versus stocks. From a technical point of view, we see limited upside to equities in the near-term. From a fundamental point of view, there is a distinct possibility that near-term weakness in economic data generates an exacerbated risk-off sentiment in financial markets.

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