If you’re curious to know what US credit investors are concerned about, the answer is “China”.
Or, actually, they’re concerned about more than a dozen things, but that list can be divided neatly in two. “There are basically two categories of biggest concerns – China-related (China, trade war, geopolitical risk) and everything else”, the bank’s Hans Mikkelsen wrote, in a note dated Friday.
What’s notable about the May edition of Mikkelsen’s US credit investor survey isn’t the overall level of concern. Rather, it’s the fact that the share of “China concern” (as it were) continues to climb. The visual on the right illustrates the point.
In the left pane, you can see what else respondents are worried about, and it’s the usual suspects. Really, though, nothing else matters with the exception of a recession. “The only other type of risk receiving a meaningful response is recession, which is mentioned by 31% of investors (trade war is highlighted by 82%), down from 36% in our prior (March) survey”, Mikkelsen notes.
As ever, the market is relatively constructive on the odds of Trump eventually striking some kind of deal with Beijing, even if recent events have pushed the date out. Fully 85% of US credit investors surveyed think a deal is in the cards.
The above lines up with the results from Michael Hartnett’s close-watched Global Fund Manager survey, which shows “trade war” topping the tail risk list for the 13th time in 15 surveys. If you count “China slowdown” as a manifestation of the trade war concerns, it’s 14 out of 15.
What’s notable – and Hartnett mentions this in the second bullet point of his executive summary – is that conviction around “trade war” as the biggest risk is comparatively low, at 37% versus more than 60% last August.
Some of the responses tallied in the two surveys cited above came prior to the Huawei escalation. That seems important, because the decision to blackball China’s crown jewel could well mean that talks will, at best, be adversarial going forward. At worst, there will be no more talks, as CNBC seemed to indicate on Friday.
“President Trump’s key leverage in the trade standoff between the US and China is the stock market, as he arguably felt emboldened by the record high two weeks ago”, BofA’s Mikkelsen goes on to say. That means it’s a question of how much pain Trump is willing to take before he decides to come back to the table.
As far as the Chinese side goes, Mikkelsen adds the following, which serves as a useful, more nuanced addendum to some of the standard commentary floating around out there:
It is well recognized that China in recent years has pursued a policy of targeting certain companies and sectors – such as, obviously, tech – with massive subsidies, giving a significant advantage trading with other countries. That means China is going up against most developed countries including Europe – not just the US. China is also an increasingly important player in global geopolitics, environmental issues, etc. Hence, we view the current trade dispute as just the first dance in many conflicts over the next few decades, and agreeing to a trade deal right now is not the final, nor most important, battle. Especially as there are many ways to mitigate the restrictions imposed by a trade deal, including red tape, etc.