How should investors strategies change?
On what seems like a daily basis, investors are being bombarded by sanctions, restrictions, and blockages that would have been unthinkable even six months ago. In this environment it is tempting to follow news without forming a coherent backdrop. However, from an investing point of view this will likely prove to be short-sighted.
The attempted separation between China and the rest of the developed world is getting deeper and it is unlikely to be fully bridged in the near term. This will apply to all aspects of life, from politics & military affairs to trade, technology, immigration to capital. While the pace is driven by US and China, and change in leadership might slow it, the trend seems irreversible. Events like the closure of China’s Houston consulate is perceived as ‘just another brick in the wall.’ US Secretary of State Mike Pompeo said the decision was taken because China was ‘stealing’ intellectual property. The danger is that the next steps might be more extreme.
There is no doubt that the restrictions on technology, trade and capital are currently centred around the Chinese and US relationship. If this war of words and platforms continues, then it is increasingly likely that most Chinese technology companies will be excluded in the US. Not only at the core but also in social, gaming and entertainment as well as fast trains and other tech related areas and, importantly, technologies to make and design chips. Similarly, Apple will need to segregate its platforms. The same will apply to Cisco routers or Caterpillar tractors. Politics and Environmental and Social Governance (ESG) will also make it harder to invest in China. Investors should assume that companies can no longer count on global scale but instead will be confined to their sphere; while this will reduce efficiency, technology will continue to erode marginal costs and localized entities will receive fiscal and monetary support.
Some Westerners will no longer compete against China; local taxation and redistribution policies will reduce social pressures. All in all, it will be different, but not all bleak.
From an Australasian perspective, this might not feel like a better world when we consider our large alliance with China as a trading partner. Unlike the globalized world of 1980s- ‘00s, investors are now facing a deglobalizing world that is characterised by rising importance of state spending (fiscal and monetary) and the public’s desire for fairness and equality rather than freedom or efficiency. It places a heavier burden on governments to manage cycles and ensure that income and wealth is shared. Therefore, over shorter to medium term there must be room in a portfolio for investors to reflect strong localization trends.