To my clients:

I commented in last Friday’s update with respect to the growing trade tensions with China that “I’m still not prepared to make portfolio adjustments to offset the risk of a no-deal outcome, although it continues to be an active consideration.”

Developments this past long weekend have turned a consideration into an action. This morning I reduced client equity weightings by another ~5%. This is the third reduction in the past 9 months. In total, equities have been reduced by about 15% over this span. The first reduction occurred in October 2018 on the possibility that the Federal Reserve might raise rates too far. The second occurred earlier in 2019 on the first inversion of the yield curve. The third occurred this morning on a continued escalation of U.S./China trade tensions.

To briefly summarize, in response to Trump’s proposed 10% tariffs on all remaining Chinese imports not already covered by existing 25% tariffs, the Chinese announced this weekend a halt to all imports of U.S. agricultural goods. In addition, the Chinese currency (alternately known as the Yuan or the Renminbi) also fell in value relative to the U.S. dollar prompting the U.S. to officially declare that the Chinese are manipulating their currency. Such a declaration opens the door to possible monetary sanctions against China, in addition to the tariffs imposed on trade goods. U.S. markets declined markedly yesterday as a result.

Overnight, China denied that it is manipulating its currency, and the Renminbi has risen in seeming support of this assertion. Markets have risen somewhat on this moderation of tensions. I made the 5% equity reduction on this bounce in markets.

Let me be clear – the direct impact of these developments still do not appear sufficient, on their own, to push the U.S. into recession. Further, no major economic indicator which RBC tracks, other than the yield curve, is indicating recession. This morning’s reduction in equity weightings was undertaken on the possibility that U.S./China trade relations might deteriorate still further, or that my and RBC’s take on the economic environment proves incorrect. It was a prudent step in my judgement.

As a reminder, I am not in the office Thursday or Friday. However, I will be watching developments intently.

Next scheduled update Friday, August 16th.

All the best,

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │ nick.scholte@rbc.com

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