Growing tensions between the U.S. and China may have some investors concerned about increased saber-rattling between the two countries, especially after a series of high-profile visits by U.S. politicians to Taiwan this summer drew angry responses from the Asian nation.
The visits to Taiwan come as the Russian invasion of Ukraine hits its six-month mark. The incursion caused some investors to suffer steep losses when they had to sell portfolio holdings following international sanctions on Russian companies.
At the time, there were some worries that China could launch a similar offensive to take Taiwan.
In early August, Rep. Nancy Pelosi (D-Calif), visited Taiwan, and was soon followed by separate trips by Sen. Ed Markey (D-Mass.) and Indiana’s Republican Gov. Eric Holcomb. Pelosi’s trip particularly angered China, the first by a U.S. House speaker in 25 years.
Beijing asserts the island democracy is part of mainland China, and in response to Pelosi’s visit, China launched extensive military drills around Taiwan and halted diplomatic communications with the U.S.
While some investors may worry the political excursions are a provocation that could eventually have portfolio repercussions, portfolio strategists and exchange-traded fund issuers say in the near-term it’s unlikely the tensions between the world’s two-biggest economies will escalate enough to affect markets.
Deep economic ties
Brendan Ahern, chief investment officer, Krane Funds Advisors, an ETF issuer focused on the Chinese markets, says although the political narrative between the U.S. and China has deteriorated over the last several years, business between the U.S. and China is deeply intertwined.
The U.S. Trade Representative data show China is the U.S.’s largest supplier of goods while China is the U.S.’s third-largest export market.
The news reports over Taiwan are exaggerated, suggests Liqian Re, director of Modern Alpha, part of the quantitative investing division for WisdomTree, and the ETF issuer’s subject matter expert on emerging markets including China.
Elections for China’s National People’s Congress are coming up in a few months, and she says she believes the increased aggression around the island nation could be a distraction by the government.
China’s economy is weak, hobbled by a Covid-zero policy and a weakening banking sector because of a cooling real-estate market.
Minimal reaction in Chinese stock markets
“China uses the Taiwan issue to unite the domestic public opinion,” she says, not unlike how U.S. politicians who are seen as tough on China do well in polls.
Ahern points out domestic Chinese stock markets, which is closed to outside investors, had little reaction to Pelosi’s visit. That suggests local investors weren’t concerned about the trip, he says, whereas shares on Hong Kong exchanges open to international investors fell.
Ahern adds anecdotally that flight-tracker apps showed commercial flights to Taipei and Hong Kong remained robust during China’s increased military exercises.
“You’d think airlines would say, this is highly problematic, and that didn’t happen, which I thought was interesting,” he said.
Re says China’s official statements around Pelosi’s visit were much more restrained than domestic public opinion. “I think people have to be aware of both sides… sometimes it’s hard to give credit to China,” he says.
Both Re and Ahern say supply chain issues may keep retaliatory actions by China against Taiwan in check.
Much of the semiconductor chips manufactured in Taiwan by companies such as Taiwan Semiconductor (ticker: TSMC) go to China to be installed in electronics eventually shipped to the U.S., so the three sides have common economic interest.
Portfolio strategists see little near-term impact
Matt Dmytryszyn, chief investment officer at Telemus, says it’s impossible to forecast geopolitical events, but it’s also important for portfolio managers to consider alternatives.
For clients who might be concerned about China, he suggests more defensive stances, such as allocating to U.S. small-cap companies which tend to have more domestic revenue than international business.
But Dmytryszyn says his firm still likes to have exposure to China’s economy, noting it’s unique to other emerging markets, particularly that it’s not as affected by global inflation.
Michael Rosen, chief investment officer at Angeles Investments, says in the near-term it’s not in either country’s interest to impose capital constraints or other actions detrimental to foreign investments.
Longer-term, however, he is cautious about investing in China because of the rhetoric between the two countries suggests a fracturing of their relationship, which could lead to fewer exchanges of goods, services and ideas.
“That’s a sobering prospect for investors… particularly in a world where the sort of existential problems that we face require global cooperation,” he says, adding that he thinks that’s a long way away.
His firm’s overall emerging markets exposure is small, and he prefers Asian investments outside of China, including Korea, Indonesia and Vietnam.
Dmytryszyn says investors can consider Latin American emerging markets as alternates to China, but he adds those countries have “different geopolitical and political risks going on.”