In a recent research note, Morgan Stanley MS Chief Investment Officer and Chief U.S. Equity Strategist Mike Wilson laid out the investment bankâs view on the ongoing trade talks between the U.S. and China. Recently, there has been an influx of news suggesting the two parties may be close to an agreement and that a deal may be signed when Presidents Trump and Xi meet at the formerâs Mar-a-Lago resort in Florida later this month.
The exact wording of the deal has not been made available, but it has been reported that it could see the U.S.Ă raise most or all of its tariffs if China agrees to implement stricter intellectual property laws and to be more transparent about its actions in the currency markets. In his note, Wilson explained why it may be a good idea to wait before buying stocks in the event that a deal is reached:
âRelative to where we were three months ago, this is undoubtedly a positive development and in line with our view that trade tensions would not escalate further in 2019. A removal of the existing 10% tariffs would be better than our expectations, however, much of this has already been priced, and these kinds of positive announcements tend to mark short-term tops in asset prices. The old adage of âbuy the rumour, sell the newsâ is a good one to remember as you think about what to do with your investments at this point.â
Some investors might be fearing missing out on a relief rally that may occur if a deal is signed. However, as market sentiment changes to a position where a deal is expected, there may actually be a selloff in the wake of such an announcement.
âAs reminder of such turning points, think about the tax cut bill passed in December of 2017. No doubt this was a positive development for the stock market, but buying stocks once it became obvious to everyone that it was happening was a bad decision from a timing standpoint. We think this US-China trade deal could be similar in that regard. Our advice is for this news to come out, and then wait for the inevitable exhaustion that comes with this kind of short-term euphoria. We expect a 5-10% correction in major equity markets.
We think that this deal will continue to support our global reflationary narrative that we have been espousing since 2016. That means global cyclicals, like industrials, materials, financials and even some technology and energy stocks will be what you want to focus on buying as the equity markets correct.â
If Wilson is correct and there is indeed a pullback, this could provide a good entry point into the type of stocks mentioned in the note. Obviously, value investors will still need to do their due diligence when picking specific plays. But a U.S.-China trade deal is good for stock prices in the long term, even if the immediate effect of the announcement is to send prices lower. As such, the situation presents an interesting opportunity to enter a position, particularly if the sell-off is as big as the 5-10% range forecast in the note.
Disclosure: The author owns no stocks mentioned.
