Clashing powers

China is the world’s largest manufacturer of finished goods and the US is the biggest customer. And yet, both nations have expressed frustration with the other’s behavior. As companies in China move up the value chain and produce more sophisticated products, the level of tension is likely to increase.

We expect limited partnership in this area and instead see two parallel ecosystems evolving across key technologies that affect security like 5G and artificial intelligence, or the cybersecurity industry itself. Along with US and Chinese names, investors should diversify and consider additional vendors in Europe, Japan, and Korea. Cybersecurity remains a key trend for us, and global tensions, including in cyberspace, are a major driver.

Trade skirmishes, compounded by the COVID-19 pandemic, have demonstrated the susceptibility of global supply chains to exogenous shocks. US and Chinese companies are diversifying their suppliers. For lower margin products the trend has been underway for years. For higher end electronics, the move is more challenging. In our base case of very incremental movement of supply chains, investor impacts should be manageable.

Regulatory discrepancies between the two countries, aggravated by targeted US sanctions, will add momentum to more frequent dual listings and exclusive listings in China. Market liquidity may be temporarily reduced, and volatility in some names will rise, but share price losses are likely to be temporary since we don’t think the long-term value of the underlying companies will meaningfully change. The variable interest entity (VIE) structure that allows such listings is unlikely to be scrapped by China, and the majority of US listings are fungible to Hong Kong. Investors should maintain exposure to tech and platforms on both sides.

Investors should expect no immediate impact on their portfolios from tensions in this space. The US dollar will likely retain its position as global reserve currency for the foreseeable future. But the renminbi is poised to become more important in the next decade. Investors could gain exposure to the currency’s long-term trend by investing in the country’s assets.

Continued collaboration, with moderately increasing competition, would be neutral to modestly positive for the semiconductor industry, although earnings may become more volatile over time. A technology race between the US and China would likely also provide opportunities in other areas like software and data centers.

Differences between Washington and Beijing on China’s territorial claims in the South China Sea and human rights will be a point of friction. The mainland Chinese military is unlikely to occupy Taiwan because of the diplomatic fallout and supply chain disruptions, in our view. A risk is a mishap in the South China Sea, which could place the leaderships of both countries in a tight position.

We expect a more cooperative relationship on climate change, but friction is inevitable here, too. China is a key source of raw materials in the cleantech supply chain, and any further restriction on trade could restrain the production of solar panels and high-capacity batteries. Regardless of whether cooperation is achieved, we remain optimistic about investments linked to climate change.