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Top investor makes contrarian call as trade uncertainty grips Wall Street

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China could be about to rebound in a big way, Richard Bernstein says

Trade talks don't resume until Thursday, but Wall Street is already worried a deal can be struck.

The Dow tumbled more than 200 points on Tuesday morning as pressure increased heading into the high-level negotiations. The Trump administration blacklisted some Chinese tech on Monday and is reportedly considering limiting government pension investment in Chinese stocks.

As tensions escalate, Institutional Investor hall of famer Richard Bernstein is ready to make a contrarian call on one casualty of the trade conflict — the Chinese economy.

"Because of trade, there's been tremendous amounts of monetary and fiscal stimulus injected into the Chinese economy. Now, unless you believe that Economics 101 doesn't work anymore, which I would argue is incredibly bearish, then you should start to look for signs that the economy is beginning to turn," the CEO of Richard Bernstein Advisors told CNBC's "Trading Nation" on Monday.

Chinese GDP declined in the second quarter to 6.2%, down from 6.7% in the three months to June 2018. Bernstein sees signs of a turnaround in another data set.

"Surprise, surprise, China is the only major economy where leading indicators — very important word 'leading indicators' — are accelerating," said Bernstein. "One could argue it's not showing up in their numbers. Of course not. That's because these are leading indicators. It will appear in the leading indicators before it appears in GDP."

The Conference Board's Leading Economic Index for China increased by 1.1% in August. It rose by the same amount in July.

A Chinese economy in recovery comes as the U.S. corporate world faces troubles of its own, adds Bernstein.

"Profits have been decelerating now all through 2019, and we actually expect that to continue. I think the risk right now is that first half of 2020 we actually see a full-blown profits recession where earnings growth for the S&P turns negative on a year-to-year basis," he said.

To hedge against an earnings slowdown or recession, Bernstein is putting money to work in traditional defensive sectors such as staples, health care, utilities and real estate. The utilities and real estate sectors are two of the best performers this year.

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Top investor says this contrarian play is best as trade talks resume