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US-China dynamics key to geopolitical investment risk

3 February 2021

As the US welcomes in a new administration, attention will turn to the country’s relationship with China, with investment managers expecting US-China dynamics to be a key feature of the geopolitical landscape and investment risk for years to come. 

Pruksa Lamthongthong, co-manager, Asia Dragon Trust, says: “While Biden is likely to pursue a multilateral and more predictable stance when it comes to China, his initial moves are sending a pointed message that his administration is unlikely to be a pushover when it comes to managing its relationship with Beijing. It is still early days yet, though and we will continue to monitor developments from here.”

Roddy Snell, co-manager, Baillie Gifford China Growth Trust, says: “Tensions between China and the US are unlikely to diminish. However, despite the headlines, it is noteworthy how unaffected China has been by US actions. For example, tariffs have failed to impact Chinese exports which are booming and growing more strongly than any time in the past decade as they take share from Western markets.

“Threats to delist Chinese companies have simply led to Chinese companies dual listing or listing in Hong Kong where they are welcomed with open arms and many sanctioned stocks have seen their share prices rise after they have been identified by the US. In the meantime, China has prepared extremely well for future tensions by rapidly moving up the manufacturing value chain, rebalancing its economy away from investment, and is arguably innovating faster than any country in the world. R&D already exceeds the US and EU combined.”

While the Covid-19 pandemic caused severe market turbulence across global economies with governments forced to implement national lockdowns, China’s economy grew 2.3% in 2020, making it the only major economy to grow last year.

Rebecca Jiang, co-manager, JPMorgan China Growth and Income Trust, believes that while Covid-19 caused “a short-term shock” to the Chinese economy, “the government’s quick and comprehensive mobilisation at the start of the pandemic means that the impact to consumption and business confidence has been largely cyclical and not structural.

“While some industries are still seeing some short-term pain, overall we are finding that activity levels on the supply side of the economy have recovered more quickly than on the demand side, although both are showing some encouraging signs.”

“The pandemic has been enormously disruptive but China has fared well compared to other countries in the region,” adds Ian Hargreaves, manager, Invesco Asia Trust. “The economic recovery has also been managed without the authorities having to rely on the sort of fiscal impulse manufactured in developed economies, with suggestions that some form of modest monetary tightening is a possibility.”

China going forward

Looking ahead Hargreaves said China’s ability to resume pre-Covid-19 activity levels across many sectors bodes well for its future outlook.

“We are confident that China’s large and growing equity market will continue to provide us with a good selection of companies to choose from.”

Dale Nicholls, portfolio manager, Fidelity China Special Situations, echoed the sentiment.

According to Nicholls: “We remain firm believers in China’s long-term structural growth story and are focused on identifying companies, across both public and private markets, that are best placed to benefit from a growing middle class and the shift towards a more consumption-driven economy.  With our in-depth bottom-up fundamental analysis, we are uniquely placed to identify very early on the many opportunities available among mispriced companies that offer direct exposure to China’s long-term growth story in effect: tomorrow’s winners.”

China is also expected to become one of the fastest growing countries over the next decade, driven in part by its growing demand for technology, with structural growth drivers such as the adoption of cloud applications, 5G and artificial intelligence remaining intact.

Snell added: “As Chinese companies continue to ramp up their investments in research and development, combined with the world’s largest middle class whose appetite to consume and adopt technology is arguably faster than anywhere else in the world, we are confident China will be one of the fastest growing countries over the next decade. We are also confident it will become the world’s largest economy and be home to many of the world’s leading technology firms.

“It is perhaps surprising that despite these attractions China is significantly underrepresented in global portfolios. Globally China is 18% of market cap, 30% of listed stocks, but only 2.5% of global funds’ allocations. As the market continues to open up and its vast potential is realised, this simply has to change. We believe investors would be wise to consider holding China now to get ahead of this substantial anomaly.”

Professional Paraplanner