Goldman Sachs created a new metric to measure how US-China tensions impact stocks, and said that there's still money to be made from the conflict
- Goldman Sachs has created a new metric to evaluate the relationship between US and China and its impact on markets.
- The US-China "relations barometer" is not limited to an evaluation of only trade risks, but also analyses technology, capital markets, and geopolitics.
- There is "still decent risk/reward for Chinese stocks unless US-China relations substantially deteriorate from here," Goldman strategists wrote in a research note.
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A focus on trade relations between the US and China is not the best approach to judge market risk, according to Goldman Sachs.
The investment bank formed a US-China "relations barometer" that assesses not only trade risks, but also those linked to technology, capital markets, and geopolitics.
"Focusing exclusively on bilateral trade frictions is no longer sufficient for investors to comprehend the complicated US-China dynamics and to subsequently assess risk/reward in the equity market," strategists at the bank wrote in a research note dated July 5.
Sources of tension between the countries emerged during 2018 and 2019 when trade and technology dominated investor concerns. But the focus has shifted to more strategic issues, such as the US opposition to a new security law in Hong Kong, strategists said.
Unless US-China tensions significantly deteriorate, there is "still decent risk/reward for Chinese stocks" the note said, leading to an "overweight" call for investment in the region from Goldman.
"Old Economy and Value may have generally overreacted to the rising tensions, while 'New China' and Growth may have under-priced the US-China risk," the strategists wrote.
After the US-China trade war kicked off in 2018, Goldman Sachs developed a "trade tension barometer" and its implied probabilities for stock valuations, but the bank believed it no longer accurately reflected wide-ranging issues affecting the markets.
Assets that are most exposed to US-China relations are technology companies and American Depositary Receipts, the note said.
At the same time, companies focused on domestic-demand-consumption and others in healthcare are "relatively immune."
Below is a selection of stocks Goldman says do better or worse than normal during periods of rising tension:
On Monday, Chinese stocks recorded their best intraday rise in a year as investors pinned their hopes on a swift economic recovery, showing that the first country to get infected by coronavirus is rebounding from the impact.
The benchmark Shanghai composite index rose as much as 6%, and the CSI 300 Index of Shanghai and Shenzhen stocks surged 5.7%.