Ray Dalio calls it a “long ideological war.” Mark Mobius sees little hope for a quick resolution. And Stephen Jen says we’re witnessing the start of a 15-round fight.
As the U.S. and China clash over everything from trade to technology, some of the biggest names in investing are bracing for a protracted superpower conflict and adjusting their portfolios accordingly. Mobius, for instance, is avoiding shares of Chinese exporters and buying companies that sell to domestic consumers.
“This contest will be a drawn-out process that will likely last our careers,” said Jen, a former economist at the International Monetary Fund and Morgan Stanley who now runs Eurizon SLJ Capital, a hedge fund and advisory firm. “We as investors and analysts need to pace ourselves, and try to not just follow the latest news. We need to understand the economics and the cultural differences.”
Bets on an easing of tensions that helped propel stocks toward record highs just four weeks ago are quickly unwinding.
Global equities lost US$4 trillion of value this month, while U.S. Treasury yields plunged to the lowest level since 2017 as Donald Trump’s administration raised tariffs on Chinese goods and slapped Huawei Technologies Co. with potentially devastating supply curbs. Xi Jinping responded by calling on his compatriots to join a “new Long March” and Beijing geared up to weaponize its dominance of rare earths — key ingredients in smartphones and electric cars.
For Dalio, the billionaire founder of Bridgewater Associates, the conflict goes well beyond a trade war. As China emerges as a world power capable of challenging the U.S., the countries will clash in “all sorts of ways” because of different approaches to government, business and geopolitics, he wrote in a series of posts on LinkedIn this month that didn’t mention his investments.
“They can’t negotiate these more fundamental issues,” wrote Dalio, whose firm oversees about US$160 billion and has offices in Westport, Conn, and Shanghai.
Even if Trump and Xi manage to hammer out a trade deal (they’re expected to meet at the G20 summit in June), China and the U.S. will keep clashing over such issues as technology for the foreseeable future, according to Mobius.
We're in a new game — Trump has really opened this can of worms
Mark Mobius, Mobius Capital Partners
“We’re in a new game — Trump has really opened this can of worms,” the emerging markets veteran, who left Templeton Asset Management last year to co-found Mobius Capital Partners, said in an interview with Bloomberg Television. He flagged India, Vietnam and Bangladesh as potential beneficiaries as the conflict spurs manufacturers to diversify away from China.
Kyle Shin of Gen2 Partners, who manages about US$1.3 billion in hedge funds, returned from a recent China trip convinced that the conflict will take decades to resolve. As Chinese bonds in his portfolio mature, Shin is replacing them with high-grade corporate debt in developed markets, he said in a phone interview. The Hong Kong-based manager’s flagship fund has posted mid-single digit returns this year after gaining 20 per cent in 2018.
Kingsmead Asset Management’s John Foo has gone even further, selling all his holdings of Chinese stocks for the first time in his two-decade career managing money in Asia. He offloaded the shares in mid-2018 because of the trade war and tightening credit conditions.
Foo has since turned the Kingsmead Asian Alpha Opportunities Fund into a multi-strategy hedge fund focused on economies along the Mekong river, such as Thailand and Vietnam. Southeast Asian countries, which have a long history of working with both the U.S. and China, stand to benefit as supply chains shift, Foo said.
Not everyone anticipates dramatic changes to the status quo. James Gorman, Morgan Stanley’s chief executive officer, said in an interview with Bloomberg Television that he doesn’t expect a full-blown trade war, even as he cautioned that it will take decades for the countries to sort out all their issues. Eurizon SLJ’s Jen sees 80 per cent odds that the conflict will eventually end peacefully.
Some traders view recent losses in risky assets as opportunities to buy. Yunqi Capital, a Hong Kong-based hedge fund that manages US$130 million, increased its position in Rogers Corp. in December, and again this month, after shares of the U.S. maker of specialty components tumbled.
The company, which makes printed circuit board laminates used in mobile phone base stations and other specialty components, is an indirect supplier to Huawei and ZTE Corp., another Chinese telecommunications powerhouse that has faced scrutiny from the Trump administration. Chris Wang, Yunqi’s founder, is betting that global demand for Rogers products will remain robust despite the U.S.-China conflict.
Meanwhile, hopes for progress on trade haven’t completely vanished. Andy Rothman, a former U.S. diplomat in Beijing who’s now an investment strategist at Matthews Asia, is optimistic that Trump will strike a deal before the 2020 presidential election. “I continue to believe that Trump believes a China trade deal is better than no deal for his re-election prospects,” he said.
That view helped underpin global share prices for the first four months of this year, but market action in recent weeks suggests skepticism is mounting. Trump himself said on Monday that he’s not ready to make a deal and that tariffs on Chinese goods “could go up very, very substantially.”
It’s never certain whether he will follow through on his threats, but Gen2’s Shin isn’t taking any chances.
“It might be a good time to sell in May and go away,” he said. “We don’t want to take risk in 2019.”