China vs the rest: Geopolitical struggles impact investment outcomes

From

Kim Catechis

Four years into an escalating confrontation and nearly a year into the first truly global pandemic in a century, the world is poised for a geopolitical and economic rollercoaster ride, according to Martin Currie, a global investment manager.

Investors and asset owners are greatly impacted, so we need to track a variety of issues- historical context provides the motivation; economic heft provides the arguments; ideology appears to be driving policy and the result is a significant challenge for investors, writes Kim Catechis Head of Investment Strategy at Martin Currie in a new investment research paper.

He says: “The next decade will likely see increasing efforts to disassociate the two largest economies in the world. Investors are well aware of the mounting pressure on governments to take sides.

“In the developing countries, China’s offer of the BRI has already been accepted. The only issues that could potentially derail this development are a sudden and commensurate generosity of finance from the US, evidence of poor-quality execution in the BRI, or a particularly shocking political misstep by Beijing. All seem unlikely at this point, thus underlining that should the US-China decoupling continue, there are many countries already committed to the Chinese sphere of influence.

“The aggressive moves against specific companies by the Trump administration, however, have set dangerous precedents. It is not just a question of adverse publicity being driven by an unguarded tweet, it can impact the revenues and profitability of third-country companies, as has been demonstrated by the pressure campaign on Taiwanese TSMC in order to get at Chinese Huawei. In this case, TSMC enjoys a leading position in the industry, so the company has options that others would not.

“Investors need to stay abreast of developments and understand the perspective to identify companies that are particularly vulnerable. At the same time, investors should be planning for a future where an asset owner’s geography effectively determines the investment universe – something we have not considered for decades.”

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