The Art (and Risk) of the China Deal: A Primer on This Week’s Summit

The President of China, Xi Jinping, is poised to visit President Trump at his Mar-A-Lago hotel resort later this week, and the highest priority on the agenda will likely be trade deals. This will be the first time our president will have the chance to go head to head with the leader of the second-largest economy in the world, and one we currently have an unbalanced trading relationship with.

Specifically, the U.S. runs a massive $347 billion annual deficit with China, and an overall trade deficit of 3% of GDP – meaning we import more from other countries than we export to them. The consumer is still the largest component of U.S. GDP at 70%, so comparatively speaking, imports and exports (at 15% and 12%, respectively) are smaller.

But that doesn’t mean the consumer is completely immune to trade policy. Americans shopping at Targets and Wal-Marts could see the price of clothes and other goods surge if we don’t reach an amicable deal with China on trade.

Indeed, not being able to work together could hit our consumers with the equivalent of a tax increase. That would limit how far our dollars go, curbing confidence and spending. And that could prove disastrous to our economy as a whole, given that consumers are the bread and butter of our economy.

So is there reason for optimism or pessimism here? Well, China trade was a big sound bite during the election process, with then-Candidate Trump saying they’re ripping us off. Our two countries have also crossed swords over key geopolitical issues. China will want to address our Secretary of State’s statements about a naval blockade around Chinese-made islands in the South China Sea, for instance, and get confirmation that the U.S. will respect the “One China Policy” on Taiwan.

It’s going to be a challenge for president Trump, there’s no doubt. He’s trying to get better trade terms, create manufacturing jobs here in the U.S., and erase that burdensome deficit. The stakes couldn’t be higher, and any upsets here could lead to a leg down in the market.

But my expectation is that things will ultimately go cordially, and that the markets will react positively. Small caps could do particularly well regardless because they’re less exposed to trade issues. Overall, larger stocks in S&P 500 earn about 40% of their sales abroad, whereas the smaller stocks in the Russell 2000 earn about half of that from foreign markets.

One thing is for sure: I’ll be keeping a close tab on how the summit turns out, and how the market reacts. In particular, I’ll be following several relatively liquid small cap stocks based in China, but traded on U.S. exchanges.

This custom Stock Screener shows all such equities we follow that are priced for less than $10. They had to have at least $50 million in market capitalization and 50,000 in average daily trading volume to be included in the Screener, which is sorted in descending order by Weiss Rating. Here’s what the results looked like as of Tuesday:

Keep in mind that you can create Screeners like these if you’re a Weiss Platinum member, or get signed up here if not. Our Screeners are a great way to look for “buys” based on a multitude of criteria, and I use them in my own research for my Top Stocks Under $10 .

Best wishes,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.