Election creating shadow over prospects for China – Pensions & Investments

Robert Horrocks, San Francisco-based chief investment officer and portfolio manager at Matthews International Capital Management LLC, said Tencent's messaging apps are so ubiquitous on the mainland and so key to doing business there that U.S. companies could be the biggest losers if they find they can't use them.

A "light touch" by the U.S. would be welcome but with the election looming large, pressure to do something dramatic could be considerable if U.S. policymakers don't want to be seen as "a paper tiger," Mr. Horrocks said.

Morgan Stanley, in an Aug. 9 note about the U.S. move, kept its "overweight" recommendation for the stock, pointing to Tencent's scant 2% revenues coming from the U.S. But it called the potential for the U.S. to sanction more of the firm's businesses or investments a "downside risk," casting a cloud over Tencent's ambitions to grow its smartphone game business globally.

Eng Teck Tan, a Singapore-based senior portfolio manager with Nikko Asset Management overseeing the firm's Greater China portfolios, said many Chinese investors, seeing a considerable amount of short-term political posturing in Mr. Trump's moves, remain poised to buy Tencent's shares should they fall further.

Managers at global firms, by contrast, believe there's broader backing in the U.S. for a more confrontational approach to China, raising the prospect of the global growth prospects for Chinese social media and technology heavyweights being more constrained over time, Mr. Tan said.

"Anti-Chinese sentiment in the U.S. is bipartisan and may not meaningfully improve after November, regardless of who wins," said Cambridge Associates' Mr. Costello, predicting "the tone, tenor and tactics may change, but not the substance."

U.S.-China relations have been "fundamentally reset," and should remain "a bit more confrontational certainly much more focused on longer-run, strategic tensions," agreed Robert Gilhooly, who joined Aberdeen Standard Investments at the start of 2020 as senior emerging markets research economist after a decade with the Bank of England focused on China macroeconomics.

Still, he said, a Joe Biden presidency would likely be "less erratic in its policy setting (and) a bit more multilateral as well."

Mr. Tan said a continuation of tougher U.S. policies toward Chinese companies won't matter greatly over the coming few years but over the longer term, when expansion overseas would be an increasingly important source of growth, it could weigh on the valuations investors are willing to pay for leading Chinese technology companies.

Some asset owners contend that heightened political sensitivity isn't confined to U.S.-Chinese relations.

The political tensions and geopolitical issues cropping up now are "not only about technology investment in China but (apply) to a lot of investments globally" part of the discussion for every single investment whether in Europe, Canada, the U.S. or China, said Suyi Kim, Hong Kong-based senior managing director and head of Asia-Pacific with the C$434.4 billion ($324.5 billion) Canada Pension Plan Investment Board, Toronto, in an Aug. 18 panel discussion sponsored by FCLT Global.

Still, market participants agree that geopolitical frictions between the U.S. and China carry outsized risks for the global economy.

"The two economies that matter in the world are clearly the U.S. and China (and) there's a huge level of economic interaction between the two," said Phillip Nelson, a Boston-based partner and director of asset allocation with NEPC LLC.

The question becomes, "how do the two countries manage their economic growth, knowing that both countries are working together and competing with one another," Mr. Nelson said. U.S. moves to make changes to how the two countries are linked economically a risk "that will likely ebb and flow through time" will have an outsized impact on investor sentiment.

Some see that competition leading to spheres of influence.

"We're inevitably going to see a Balkanization of services and eventually of the internet itself," fragmenting hardware, software and the service ecosystem, said Jeremy Wagstaff, a technology writer and author of the loose wire blog. This may not matter much for the next year or so because people aren't traveling much but eventually as and when the health crisis subsides it will, he said.

Even so, some asset owners say tech and social media firms will remain interesting to investors even if global expansion becomes harder.

Chow Kiat Lim, the CEO of Singapore sovereign wealth fund GIC Private Ltd., speaking on the FCLT Global panel, said setbacks to the free flow of capital due to geopolitical tensions and fragmentation would be a challenge, but "the world is pretty big (and) even if you are confined to a particular region, it's still pretty big, there's still a lot of room" and a lot of competition.

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Election creating shadow over prospects for China - Pensions & Investments