US-China Tensions: What to do as an Investor?? (FINANCIAL HORSE)

Financial Horse is a leading investment site in Singapore. Check out FH's Complete Guide to Investing + REITs Masterclass

Question from a reader:

Hi FH. I wonder if you could pen your thoughts on how the US-China political tensions would influence your investment decisions. For example the classification of some big China companies such as SMIC and CNOOC as military affiliates may have implications such as their withdrawal from certain funds to cater to US investors, or that the non-participation of US funds may have repercussions on indices such as HS Tech or the HSI. There are other broader issues of course, such as the trade, technology and geopolitical conflicts. It would be nice to hear your views and others too on how you might approach this in the near, mid and perhaps long term, even though it is notoriously difficult to calculate the impact on the financial market further out into the future.

That’s a really good question.

The short answer, is that it is really, really tough to anticipate the full impact.

I literally have no idea how Biden is going to handle China in his first month in office, let alone 6 or 12 months down the road.

To be able to generate alpha (returns beyond the market) from this, you need to have either

(1) inside info on how US-China plays out, or

(2) a better framework for predicting US-China relations than what the market has.

And unfortunately, very few of us have an edge on (1) or (2).

When faced with situations like this, I like to go back to basics.

Longer term, there are a couple of constants here that won’t change regardless of how the short term plays out:

· China will grow into the largest economy in the world – The US has about 300 million people. China has about 1.4 billion. Even if China achieves 50% of US’s GDP per capita, it’s already double the size of the US economy.

· As China grows, it’s political clout will increase – This one happens throughout history. The bigger a country’s economy becomes, the greater the impact on geopolitics. Think about China levying 200% tariffs on Australia wine, and extrapolate that 10 years into the future when China is the number 1 trading partner for the entire APAC region.

· The conflict between US and China is the defining fight of our generation – For those who haven’t read Destined for War by Graham Allison, I highly recommend it if you’re interested in US-China relations. It talks about the Thucydides trap – where a rising nation, and the uncertainty this causes in the prevailing power of the day, means the two will inevitably lead to conflict. The conflict can be a cold war (like US-Soviet Union or US-UK before that), or it can be a hot war (UK-Germany, UK-Spain). The US and China are locked in a multi decade struggle for supremacy, and the past 4 years are but a taste of what is to come. Whether this leads to hot war or cold war, and who will emerge supreme – history will tell us but it’s far too early to tell now.

· Technology will change the world – The same time as this US-China conflict is playing out, we have the entire world changing because of the impact of technology. The future of the world will be controlled by those who controls tomorrow’s technology – AI, machine learning, 5G, new energy, advanced materials, 3D printing etc. Both US and China are aware of this, and are making massive investments accordingly. But it remains to be seen who will reign supreme in this new field of technologies. My best guess is that technology supremacy will be divided between the US and China, each with their own areas of strength.

Again, these are long term secular trends, but you can’t predict how the day to day plays out specifically.

2021 Stock Watch: Financial Horse brings you a monthly Stock Watch for Singapore, China/HK, US markets + exclusive premium investing content

As an investor, the big trends I MUST have exposure to, are:

· Exposure to China’s Growth

· Exposure to US’s Growth

· Exposure to new technologies

Long term –I want exposure to both the China and US economies, and I want exposure to technology.

Short term – Lots of uncertainty over how the short term plays out. We don’t even know what Biden will do when he is in office. But any sell off here is an opportunity to add to long term positions in strong companies that fit within this broader theme. To protect against the short term, diversification and proper asset allocation are important – maintaining the right balance of cash vs risk assets vs inflation hedges.

Mid term – The mid term (2 to 3 years) is actually the point of maximum uncertainty. This is too short for big picture macro to come into play, and where what happens in the short term has a big impact. Personally I don’t plan for the mid term. I plan for 12 months out (via short term tactical allocation), and I plan for 5 to 10 years out (via strategic asset allocation). 2 to 3 years is that deadzone where it’s really tough to forecast.

Once you get the big picture settled, it’s then about execution – what stocks do you buy to build this exposure.

The plays that I like for China are:

· Technology stocks

· Banks

· Real estate

2021 Stock Watch: Financial Horse brings you a monthly Stock Watch for Singapore, China/HK, US markets + exclusive premium investing content

Consumer goods is another sector worth looking into, but those tend to be very volatile, and frankly many trade at unreasonable valuations (Moutai is a good example). They’re ok for momentum investors who want to ride a trend, but for longer term investing, it’s hard to ignore valuations.

If you liked this, you may also like How to Build an All-Weather Portfolio for Singapore Investors.

Financial Horse is a leading investment site in Singapore. Check out Financial Horse's Guide to Investing (Massive Xmas Promo right now!)