Tensions between the West and China are escalating, encompassing trade tariffs, tech competition, and espionage allegations. This has significant implications for global markets as both Washington and Beijing aim to reduce their reliance on each other, leading to the disruption of established supply chains. While this may contribute to elevated inflation and interest rates, there are potential benefits for emerging nations and tech giants that align themselves with the winning side of this power struggle.
The first consequence of Western-China tensions is the potential impact on inflation. U.S. President Joe Biden is determined to bring back strategic manufacturing sectors like electric vehicles and semiconductors to the United States. As part of this effort, TSMC, the world’s largest chipmaker, is relocating some of its production to Germany to diversify supply chains away from China. However, research from Goldman Sachs suggests that this reshoring of production could have inflationary effects, especially if Western manufacturing fails to ramp up quickly enough to compensate for declining imports. Wouter Sturkenboom, chief investment strategist for EMEA and APAC at Northern Trust, highlights that undoing the globalized world built for efficiency and cost-effectiveness will inevitably lead to increased costs.
The prolonged period of U.S. inflation resulting from these tensions also implies that interest rates will remain higher for a longer duration, which in turn strengthens the dollar. A stronger dollar can export inflation to resource-importing nations in Europe, as they are forced to pay more for commodities priced in dollars. This poses a challenge for central banks that target 2% inflation, as market indicators of long-term U.S. and European inflation expectations are already running higher.
Another consequence of Western-China tensions is the concept of “friendshoring” promoted by Washington. This involves replacing China’s role in supply chains with friendly nations. Research conducted by Laura Alfaro from Harvard Business School identifies Vietnam and Mexico as the primary beneficiaries of this shift in the U.S. supply chain so far. Additionally, Mongolia is actively seeking U.S. investment in mining rare earths, which are essential materials for high-tech products like smartphones.
In conclusion, the escalating tensions between the West and China have far-reaching implications for global markets. The potential consequences include elevated inflation and interest rates, as well as the reshaping of supply chains and the emergence of new winners in the tech industry. It remains to be seen how these tensions will continue to shape markets in the future.The Philippines is actively seeking infrastructure investment from the United States. According to Anna Rosenberg, head of geopolitics at the Amundi Investment Institute, the tensions between China and the United States provide a new perspective on the growth prospects of emerging markets.
India is seen as a strong competitor to China in terms of low-cost, large-scale manufacturing. Its young population and growing middle class present opportunities for multinational companies that are looking for alternatives to China. Indian stocks have already rallied 8% this year, and JPMorgan’s plan to include India in a key government bond index next year is expected to further boost investor flows into the bond market. Christopher Rossbach, chief investment officer at J. Stern, sees India as a significant opportunity for global companies.
India’s central bank predicts a 6.5% expansion of the economy this fiscal year, while China is expected to grow around 5% this year. Barclays believes that if India can achieve an annual economic growth rate of 8% over the next five years, it could become the largest contributor to global growth.
The clash between China and the West has consequences for both sides. The European Union is currently investigating whether to impose punitive tariffs on Chinese electric vehicle imports that it believes benefit from excessive state subsidies. On the other hand, U.S. subsidies for domestic semiconductor manufacturing have boosted Intel’s shares. However, the performance of major U.S. tech stocks and global share indices are vulnerable to Chinese retaliation. For example, Apple’s stock experienced a significant decline of more than 6% over two days in early September due to reports of a potential ban on government workers using iPhones in China.
Given that China is the dominant buyer of luxury goods, Western fashion houses are also affected by the tensions between China and the West.China’s top anti-corruption watchdog has made a commitment to eradicate what it refers to as the indulgent lifestyle of Western elites. In line with this, Chinese banks have instructed their employees not to wear luxury European items while at work.
According to analysts from Barclays, the increased scrutiny from the government has started to impact the spending habits of wealthier Chinese consumers. This has resulted in a decline in luxury sector shares, which initially surged when China eased COVID-19 restrictions in early 2023. The ongoing economic struggles in China, coupled with escalating tensions with the West, have further contributed to the slump in European luxury stocks, which fell by 16% in Q3.
The bearish investment case for China extends beyond politics, as the country’s faltering economy and property market turmoil also play a role. Additionally, the prospect of continued tariffs and the challenges associated with navigating U.S. restrictions on investing in Chinese technology further complicate the investment landscape. As a result, investors are divided on how to approach the Chinese market. A JPMorgan survey revealed that 40% of credit investors held a bearish view on China, while a similar proportion expressed a desire to increase their allocations. Some investors, like RW Baird’s vice chair of equities Patrick Spencer, are actually becoming more positive on China due to the market’s widespread negativity. Spencer believes that market expectations are overly pessimistic and that the reality is slightly better.
In conclusion, China’s crackdown on the indulgent behavior of Western elites, as well as the country’s economic challenges and geopolitical tensions, have had a significant impact on the luxury sector and investment sentiment. While some investors remain bearish on China, others see potential opportunities in a market that is currently disliked by many.
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