Investors can return to obsessing over relations between US and China

Stock market investors spent most of 2019 obsessing over the state of trade relations between the US and China. Now they can return to the subject in 2020. As the US presidential election approaches, Trump’s anti-China stance on Covid is intensifying and this week produced a highly unusual piece of policy-making in Washington.

The extraordinary episode was the order, more or less, from the US administration that a $600bn US federal pension fund should drop a long-planned investment in Chinese shares. Strictly speaking, the intended investment by the Thrift Savings Plan was merely a re-allocation of a portion of its portfolio into a global share index that includes China. But it was enough to enrage the White House.

Investing in Chinese companies exposed the fund to the “possibility that future sanctions will result from the culpable actions of the Chinese government with respect to the global spread of the Covid-19 pandemic”, said its blistering letter.

Trump appeared to threaten further action in the same vein on Thursday by saying he would be “looking at” Chinese companies listed on US stock markets that do not follow US accounting rules. What does that mean? Forced de-listings? For good measure, he wondered what would happen if US just “cut off the whole relationship with China”.

If a fresh front in the financial war with Beijing has been opened, what’s next? Imposition of the sanctions threatened in the Thrift letter? A campaign to encourage patriotic Americans to rid their own pension plans of exposure China? Rip up phase one of the trade deal that was signed with Beijing in January?

Any of the above would risk further turmoil in stock markets, which is probably not what Trump would prefer going into the polls. On the other hand, the real economy matters more and Trump seems resigned to the idea that recovery won’t start in the US until the fourth quarter of this year, which may be too late for his electoral ambitions. More protectionist measures could become a serious campaigning option.

For investors, it’s yet another factor to consider amid the economic fallout from the pandemic. US-China relations have been merely a background theme this week to the appalling economic news. That could quickly change.

Once you’re in, you’re committed

The Takeover Panel is one of the faster-moving City watchdogs, so we should expect a ruling soon in a small but intriguing case: should the bidders for Moss Bros be allowed to drop their £22.6m offer?

If it were to happen, it would be a historic concession because the bidding principle is usually strict: once you’re in, you’re committed.

One can understand, of course, why the bidder wants to invoke the “material adverse change”, or MAC, clause, and wriggle out. The outfit called Brigadier – essentially a vehicle for a few wealthy investors – makes two main arguments. First, that Moss Bros’s prospects have been damaged. Second, that the damage goes beyond what could have been imagined when the bid was launched on 12 March.

The first point definitely seems correct. Moss Bros’s shops are closed and physical distancing rules will be a killer for the summer wedding season, one big driver of demand for dress gear. Even Royal Ascot, though it’s likely to happen next month, won’t be open to punters in costumes.

The effects of social distancing could also last for ages, Brigadier can argue, making the pandemic different from the 9/11 terrorist attacks in the US in 2001, the last time a bidder tried to invoke a MAC clause. In that instance, the Panel forced WPP to follow through with its offer for advertising agency Tempus.

But Brigadier is surely on very weak ground in pleading that it was all unimaginable. One passage in the WPP/Tempus ruling still seems crucial: a bidder must show that exceptional circumstances “could not have reasonably been foreseen at the time of the announcement of the offer”.

It’s true that the UK authorities were woefully relaxed about Covid on 12 March – Liverpool played Atletico Madrid at Anfield the night before. But, come on, it was within the range of reasonable possibilities that the pandemic could rapidly get worse.

Brigadier was free to await developments before bidding, but chose not to. Common sense says it should be held to its offer.

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