Via Goldman comes the market for anything:
Given the assumption that the observed datapoints are normally distributed, barometer readings can be seen as the market-implied probability for a “trade deal” if one believes the historical highs (Jan 19) or lows (Mar 18) over the past 18 months are in fact reasonable representations of those outcomes. Using this logic, the market is currently discounting around a 20% chance that a trade resolution could be reached by the two sides, versus close to 80% in late April. Once again, the barometer only focuses on the market-implied probability/expectation of a trade resolution, and the nature/feature of a “deal” is out of the scope of this analysis.
As the barometer appears fairly correlated with the aggregate index P/E, one can also deduce the expected market P/E under a “trade deal”/”no trade deal” scenario based on simple regression analysis. In a nutshell, the model shows thatMXCN should trade at around 11.5x forward P/E under Goldman’s China base-case growth (6.4% GDP), FX (USDCNY @ 6.95), and US monetary policy assumptions (US FCI ex Equity @100.2), but “trade”, as a standalone factor, could drive index PE to 13.5x and 10.5x in a “trade deal” and “no trade deal” situation, respectively. This is largely consistent with the suggested results from the barometer that the market is factoring in a fairly slim chance for a “trade deal” to materialize at the moment.
