China's alignment with
Russia as it began its war
with Ukraine has further
emphasized its ideological and
geopolitical differences with the US.
China's President Xi has said that the standoff
between countries over their alignment
in the Ukraine war could be more damaging
to the world peace than the war itself.
This additional uncertainty
is clearly unsettling for investors.
Is escalating tension now the only prospect
for US-China relations?
How will it impact global trade and security?
And what does it all mean for global portfolios?
The US-China differences over Russia
are merely the latest development in a momentous struggle
between the world's two economic superpowers.
We call this struggle "G2 polarization"
and it is playing out on many different spheres,
including trade, financial markets, technology,
military capabilities, and diplomatic influence.
While highly distracted by domestic COVID challenges,
China is seeking to become the dominant power
in its home region and beyond.
We believe this rivalry will continue to intensify,
with each side trying to advance its own interests
and block the other.
Importantly, though, intensifying rivalry
doesn't make a full-blown conflict
between the US and China inevitable.
Instead, we have long believed tough strategic competition
the likeliest outcome.
While the Ukraine standoff has accelerated G2 polarization,
our core views remain the same.
Despite US warnings, we don't expect China to be sanctioned
this year in relation to Ukraine.
With inflation uncomfortably high,
avoiding further disruption to trade and business is key.
That said, though, we don't expect much of an improvement
in G2 relations for now.
Where there are deals to be done
over trade and financial market access,
we think these will have to wait
until after US elections in November.
We also believe the immediate probability of a conflict
over Taiwan to have declined even further
in the short term.
The Chinese authorities are preoccupied
with COVID-related challenges that are creating a second
severe shock in China's economy in just over two years.
However, COVID has been lasting and decisive nowhere.
Policymakers are priming stimulus, which is likely
to be more effective when lockdowns end.
Will this occur before a key gathering
of the ruling Communist Party?
The world will be watching.
For now at least, we therefore look for relative stability
in US-China relations.
G2 polarization is related to an unstoppable trend
we call "the rise of Asia."
Asia is well on the way to becoming the foremost region
in the global economy.
As ever more Asians join the middle class,
we expect consumption to grow significantly.
Currently, China's economy is under pressure
from its ongoing COVID lockdowns.
Elsewhere, though, the bounce back from COVID
is well underway, especially Southeast Asia.
Once China eases its lockdowns, we look for recovery
in the second half of 2022.
In this environment, we see potential opportunities
for investors near-term and long-term.
Global investors frequently have far too little exposure
to Asia or none at all.
As economic power continues to shift towards the East,
we think this will prove an increasingly expensive mistake.
As of mid-2022, we see Chinese equities
trading at deeply distressed valuations.
Among the areas we find most attractive are those linked
to economic reopening, green energy, technology,
and more broadly.
Across Southeast Asia, we favor investments
linked to tourism, natural resources,
and industrial diversification away from China.
Is your portfolio oriented for the rise of Asia?
Let us show you how.