LONDON, Oct. 2 (Reuters) – Tensions are rising between the West and China. From tit-for-tat trade charges to technology competition and espionage charges.
The ramifications for global markets are significant, with Washington and Beijing’s determination to loosen their dependence on each other disrupting long-established supply chains.
That will help raise inflation and interest rates. However, there are gains for emerging nations and tech companies on the right side of the power struggle.
Here’s how Western-China tensions are shaping markets.
1. Hello inflation
US President Joe Biden is committed to bringing manufacturing back home in strategic sectors such as electric vehicles and semiconductors.
TSMC (.2330), the world’s largest chipmaker, is moving some production from China to Germany to meet demand from multinationals whose supply chains have moved up.
Goldman Sachs research finds that manufacturing can be brought home Inflation effectsEspecially if Western production does not increase quickly enough to compensate for declining imports.
“We created a globalized world for a reason, it’s efficient and cheap,” said Wouter Sturgenboom, chief investment strategist for EMEA and APAC at the Northern Foundation.
“If we extract some of that, it adds to the cost.”
Prolonged U.S. inflation means the dollar will rise and rates will remain high for a long period of time.
A strong dollar can export inflation to resource-importing countries in Europe.
Many central banks aim for 2% inflation; Market gauges of traders’ long-term US and European inflation expectations are running higher.
2. Friendshoring
Washington is promoting “friendship” – the idea of replacing China’s role in supply chains with that of allies.
Research A study led by Harvard Business School’s Laura Alfaro identifies Vietnam and Mexico as the main beneficiaries of US supply chain transformation so far.
Mongolia is seeking U.S. investment in rare earth mines, materials used in high-tech products like smartphones. The Philippines wants US infrastructure investment.
Anna Rosenberg, head of geopolitics at investment firm Amundi, said Sino-US tensions offer a “new lens” to analyze the growth prospects of emerging markets.
3. India Rush
India is seen as a country capable of competing with China in low-cost, large-scale manufacturing. Its large, young population and growing middle class create opportunities for multinational companies that see little business in China.
Indian stocks are up 8% this year ( .BSESN ) and investor access to the bond market got a boost from JPMorgan’s plan to add India to a major government bond index next year.
Property Manager J. “India is a huge opportunity,” said Christopher Rosbach, chief investment officer at Stern. “The global companies we’ve invested in are working on it.”
India’s central bank has forecast the economy to expand by 6.5% this fiscal year, while China is expected to grow by around 5% this year.
Barclays reckons that if India boosts its annual economic growth to close to 8% over the next five years, it will become the largest contributor to global growth.
4. CHIPS FOR CUTURE
The China-West conflict produces winners and losers on both sides.
The European Union is considering whether to impose punitive tariffs against Chinese electric vehicle imports, which it says benefit from excessive government subsidies.
U.S. subsidies for domestic semiconductor production have lifted shares of Intel ( INTC.O ). But the performance of major U.S. tech stocks and global stock indexes are vulnerable to signs of Chinese retaliation.
Shares of Apple ( AAPL.O ) fell more than 6% in two days in early September on reports that Beijing would ban government employees from using iPhones.
With China dominating the world’s luxury purchases, Western fashion houses are also embroiled in politics. China’s top anti-corruption watchdog has vowed to crack down on the so-called hedonism of Western elites. Chinese banks have told employees not to wear European luxury goods while working.
“High-level government surveys are beginning to weigh on spending by more affluent (Chinese) consumers,” Barclays analysts Carol Madjo and Wendy Liu said in a note.
Luxury shares rose as China eases Covid-19 restrictions in early 2023. Since then, as China’s economy has slowed and tensions with the West have worsened, they have slumped. European luxury stocks fell 16% in Q3 (.STXLUXL).
5. Sell China?
A faltering economy and property market turmoil mean China’s poor investment case goes beyond politics.
But the prospect of continued tariffs and the hassle of navigating US restrictions on investment in Chinese technology won’t help.
With China underperforming global stocks, investors are divided on how to approach this market.
A JP Morgan survey of credit investors found that 40% were tackling China, but almost the same proportion wanted to increase allocations.
“I’m really warming to China because everyone hates (the market) so much,” said RW Baird equity president Patrick Spencer. “Market expectations are too harsh and the reality is slightly better.”
Reporting by Naomi Rovnik and Tara Ranasinghe; Graphics by Kripa Jayaram, Rithima Talwani, Vineeth Sachdev, Sumanta Sen and Basit Kongunakornkul; Editing by Louise Heavens
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