Theoretically, it was the news that Wall Street was anxiously seeking. After a protracted trade war between the U.S. and China that left neither side as the clear victor, investors were ready to move forward with a productive relationship. Of course, one of the biggest beneficiaries would be China-based investments, such as JD.com (NASDAQ:JD) and JD stock.
Following a series of tense negotiations between American and Chinese delegates last week in Washington, President Donald Trump made an announcement: critically, the two sides have agreed to a temporary truce, which he has termed a “phase one deal.” According to a CNBC report:
As part of that deal, China will address intellectual property concerns raised by the U.S. and buy $40 billion to $50 billion worth of U.S. agricultural products. In exchange, the U.S. agreed to hold off on a tariff hike set for this week.
Again, on surface level, the news bolsters the argument for JD stock. Additionally, the apparent warming of relations opens the possibility of comebacks for major Chinese companies, such as Alibaba Group (NYSE:BABA) and Tencent (OTCMKTS:TCEHY). At least as far as stakeholders of JD.com are concerned, shares moved higher on last Friday’s session, as well as on Monday.
But is this announcement enough to get those on the sidelines to believe in JD.com? Despite the positive implications of this truce, the markets were unimpressed, turning in a muted performance.
Ultimately, I believe this was due to a lack of credibility. As we see with the wild gyrations with JD stock since spring of this year, trade negotiations have been all talk and little meaningful action. Based on the headlines, I wouldn’t chase JD.com here.
JD.com Is Stuck in a Cloud of Uncertainty
Over the years, Chinese stocks have generated considerable interest stateside. However, the one critical factor in China’s massive growth is the U.S. As the world’s largest exporter, China requires a robust relationship with American corporations and consumers.
Of course, with a more lasting trade deal, the optics for JD.com stock improve significantly. But what’s telling is that only one side – the Trump administration – expresses definitive optimism. According to China Daily, the country’s official state-owned English-language newspaper:
While the negotiations do appear to have produced a fundamental understanding on the key issues and the broader benefits of friendly relations, the Champagne should probably be kept on ice, at least until the two presidents put pen to paper.
That doesn’t sound like a trade deal is imminent. In my view, the Chinese government is leery about President Trump’s seemingly erratic behavior. At least in this regard, I don’t blame them. I’m also not surprised that JD stock really hasn’t moved since the end of March.
Now, it’s true that China has attempted to diversify its economy. In recent years, the government has introduced monetary, structural and fiscal reform to help transition an export-driven economy into a consumption-drive one. On paper, this should give China the edge in this current geopolitical conflict.
But in order for this strategy to work effectively, the Chinese consumer must be strong. And that’s exactly what it’s not, according to Victor Shih, Ph.D., associate professor of political economy at the University of California, San Diego. In an email correspondence, Shih described that the average Chinese households “are trapped between much higher food prices and uncertainties about future income.”
Such a negative dynamic will put off discretionary spending. Naturally, this is a net negative for JD stock.
Avoid JD Stock Until a Deal Is Done
Moving forward, we have two basic ways to play JD.com stock: gamble on the signing of a permanent trade deal or stay on the sidelines until you know for sure.
If you’re not a professional trader, you’re better off waiting. For one thing, Trump is an unpredictable world leader. His recent actions in Syria angered Christian evangelicals, who largely represent ardent support for his administration.
That shows you that Trump is a “my way or the highway” type of leader. And gambling on that is always a tough business.
Second, I don’t like the variables that the upcoming election poses for the trade war. As I’ve argued before, the president cannot look weak to his conservative base. Wavering on China, an issue which has dogged both the Obama and Bush administrations, carries significant risk.
Therefore, I see more chances of things going badly for JD stock than the other way around. The smart move is to wait for this noise to fade, if it fades at all.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.