For investors who were expecting the Biden administration to press the "reset" button in US-China relations, 2021 has turned out to be shockingly disappointing. The Anchorage meetings in March were patently acrimonious, and US Deputy Secretary of State Wendy Sherman's China visit in July did little to allay concerns on the poor direction of travel of the bilateral relationship.
We expect no marked improvement in tone and substance in the coming months. Interestingly, Presidents Joe Biden and Xi Jinping have yet to meet in person in their current functions, and both will face their own domestic political tests in November next year when the US midterm elections and the 20th National Party Congress take place. Domestic politics looks set to be front and center of their agendas, and it does not help that appearing "soft" against the other will do both leaders no political favors.
Make no mistake, we are not facing a Cold War scenario. What enabled that conflict to exist between the US and the former Soviet Union was the lack of meaningful linkages between their economies and financial markets. Today, deep linkages exist between the US and China that allow their economies and businesses to benefit from the free flow of goods and of financial and human capital. So not only is a breakup between both countries impractical, but their interconnection in some areas even looks set to grow in the coming years. "Decoupling"—an idea that often becomes a subject of debate in opinion circles—would come at a high cost, especially in terms of economic growth and technological innovation.
As China grows further in economic power and military might, while the US asserts its dominance on the world stage, the geopolitical risks this interplay poses can only rise. As investors, our work is to mitigate these risks in our portfolios. Taking sides from an investment perspective is not the right approach, in our view. Rather, seeking exposure to the different economic cycles, growth opportunities, and sectoral trends of both the US and China and beyond will best serve portfolios in the years ahead.
In this paper, we present a framework for understanding the evolving nature of the US-China relationship. We hope to give investors a tool for assessing the investment impact of incoming information in areas ranging from trade and supply chains, to technology and cybersecurity.
We hope you find this analysis useful in helping you achieve your financial goals.
Author: Solita Marcelli,Chief Investment Officer Americas, UBS Global Wealth Management.
Co-authored with Min Lan Tan, Chief Investment Officer APAC
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