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‘Hasty’ trade truce won't shield corporate America, BofA says
[NEW YORK] Investors are cheering the partial deal reached by US and Chinese negotiators last week, but a longer-term consequence of the trade war remains unresolved - and it's putting the profits of America's largest companies at risk, according to Bank of America Corp.
A "hasty" deal may shift focus away from the reversal of globalisation, BofA strategists including Savita Subramanian warned in a note dated Oct 10, before the US and China agreed to the outlines of a deal. A quickly made pact "is not a market panacea," they wrote.
Months of back-and-forth on the subject have forced US and Chinese companies, particularly tech giants, to not rely on each other, creating parallel customer bases and supply chains. This isolation crimps globalisation, the force that's been responsible for 50 per cent of S&P 500 companies' margin growth, Mr Subramanian said. A decoupling between the two countries' tech firms may precipitate a global recession, she said, citing the firm's economists.
The S&P 500 gained 1.1 per cent on Friday and major global stock indexes rose after Donald Trump said the US and China agreed to the outlines of a deal that could be signed as early as next month. Beijing consented to more than double its annual purchases of US agricultural products, and Washington said it would holster another tariff hike set for this week. Left on the table were import taxes on all remaining Chinese imports slated for Dec 15.
Higher tariffs will put the recovery of global growth at risk and, according to BofA, pose a threat to the stock prices of America's largest companies. At least 20 per cent of the variability of S&P 500 performance can be explained by long-term growth, data compiled by BofA show. By contrast, quarterly margins explain less than 1 per cent of the variability of the index's returns.
"Long-term growth matters far more than some margin compression and disruption in the near term," Mr Subramanian said. "Half of the margin expansion of the S&P 500 has come from globalization, and a reversal could be costly."