China relations in the aftermath of COVID-19
Kim Catechis and Mel Bucher, Co-Head of Global Distribution discuss the amplified geopolitical risk between the China and the US & Europe, and the implications for investors.
For investors, what really matters is that your geography is going to matter and your geography could end up limiting your opportunity set.
Mel: Hello and welcome to another edition of the AFTERMATH, and today we are talking about the strange relationships between China and the West, and I’m joined by Kim Catechis, Head of Investment Strategy to talk about this in more detail.
Kim: Hi Mel, good to see you.
Mel: Good to see you too. Can I start by asking you what the implications are for investors from the currently pretty-fractured relationships between China and specifically the US, but the West generally?
Kim: Yeah I think the implications could be very far reaching, Mel. You know, if there is no escalation at all, in the next few years we can easily see ourselves in a situation where countries around the world are split into three broad groups.
So you'll have the US-led group, which will probably cut all economic and as many economic links as possible, certainly all the cultural links with China, and it may even bar its asset owners from investing there.
The second group will obviously be China-led, and I guess they will build out their footprint, or sphere of influence rather, along the belt and road countries, and they will probably be barred from investing in the first group in any way.
Then you've got the third group, which is I guess the stubborn multilateralists, you know, and I would put the EU and Japan and the other members of the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) in there, although will probably try really hard to keep on going as best they can and try not to be squeezed too hard by the other two.
For investors, I guess what really matters is that out of all this is that your geography is going to matter, and your geography could end up limiting your opportunity set.
Mel: So, Kim, that's really interesting. Out of all that, how does it shake out, who wins?
Kim: Mel, that's a tough one, I mean, the easy answer is to say everyone loses. The textbooks that I grew up with tell me that, you know, if you put up barriers to economic links etc., you're going to get higher costs built into the system, you will have less optimal supply chains etc.
The winners I guess will be companies that, you know, were under the cosh from Chinese competition, suddenly they aren't, that'll be the companies in the West obviously.
The winners will also be those companies, that you know, are involved in the capex chains, because there will be duplicated capex on both sides of the divide, there will be duplicated research and development costs.
For consumers, clearly it means that, you know, a less optimal supply chain means higher costs, and the real beneficiaries longer term are going to be those companies that find themselves in areas, potentially technology related, where this resetting of relationships actually throws up new opportunities.
Mel: Kim, it’s been a pleasure, thanks very much, really really interesting.
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