(05 December 2019)DAILY MARKET BRIEF 2:What does the US's Hong Kong Act mean?

US President Donald Trump signed the “Hong Kong Human Rights and Democracy Act of 2019” on 27 November, resisting Beijing’s calls to veto the law amid delicate bilateral trade negotiations. The US legislation codifies an annual State Department review of whether the Chinese Special Administrative Region is sufficiently independent from Beijing to warrant its special trade status with the US. Following the signing China’s foreign ministry warned it may enact “resolute countermeasures.”

But while the legislation and resulting news headlines won’t help US-China relations, we don’t see this significantly altering the state of play in trade negotiations.

More irritant than deal breaker. China has yet to detail how it may retaliate. The passage of the bill won’t have surprised Beijing, with its near-unanimous passage through the US House and Senate constraining President Trump’s ability to spike the legislation. The new annual review process will fall under Trump’s State Department, giving the president latitude on any escalation or punitive measures.

Our Hong Kong outlook remains unchanged. The exact fallout (or unintended consequences) of the bill are not clear and, over the long term, may add another layer of investor uncertainty. However, the near term outlook for Hong Kong is unchanged. The economy is already in recession, stung by the global demand slump and weakening fundamentals at home. In our Asia portfolios, we retain our long-held underweight on Hong Kong equities, with a sector bias for defensive telecom and utility stocks.

Trade talks to continue. We also note President Trump’s conciliatory tone toward China when signing the legislation, signaling an intent to continue cordial trade negotiations. Recent commentary from China has also sounded more positive, with Vice Premier Liu He last week inviting top US negotiators Robert Lighthizer and Steve Mnuchin to Beijing for talks. In our base case (60% chance), we see the US and China agreeing to a Phase 1 deal that, at a minimum, averts additional tariffs

So while we will monitor closely how China chooses to respond, we do not anticipate this legislation derailing trade negotiations, and maintain an overall neutral stance on equities in our global tactical asset allocation.

We think investors can reassert some control over their portfolios by seeking investments less sensitive to political outcomes. Within equities, that means looking at domestic- and consumer-focused companies, which are more likely to provide reliable returns than those exposed to trade and business spending.

Specifically, we favor US stocks over their Eurozone counterparts, as 69% of US company revenue is generated domestically versus just 47% in Europe.

By UBS