In the first quarter, investors sold off their Chinese shares en masse. Foreign investors who had burned their money in Russia were afraid that a similar scenario would unfold in China, potentially leaving them with stranded assets. But there is a silver lining here, Louis-Vincent Gave, co-founder and director of research company GaveKal, told Investment Officer. “A Taiwan invasion is less likely now than it was a few months ago.”
Investors have massively reduced their exposure to Russia since the war began in late February. They do not want to do business with a country that invades a neighbour in this way. The reality of such divestment is rather difficult because the stock market has been stagnant for a long time and there is a lack of buyers.
Many investors took their losses. Something that is often relatively painless from the point of view of global investors, as their exposure to Russia was, in many cases, not that great. This does raise the question: what if this would be China, not Russia, with a possible invasion of Taiwan? Or what if China sided with Russia in a further escalation?
Louis-Vincent Gave (photo): “The first thing to underline is that the legal status of Ukraine and Taiwan is very different.
Ukraine is a sovereign nation, with a seat in the UN, recognised as a sovereign nation by every nation in the world, including, until a few months ago, Russia. Taiwan is not a sovereign nation. It has no seat at the UN and apart from a handful of small countries that recognise Taiwan as the legitimate government of all of China, no one recognises Taiwan as a sovereign entity. Everyone in the world has accepted China’s mantra that Taiwan is a ‘renegade province’.”
“So while Russia clearly violated international law when it invaded Ukraine, the situation around an action in Taiwan would not be so black and white…. At least, in purely legal terms.”
IO: How urgent and real is this issue in your view?
Gave: “Russia’s invasion of Ukraine has probably made the chance of an invasion of Taiwan smaller than before. Why? Firstly, the strong Ukrainian defence has shown the world that invading a country is not that simple and can only be done at great cost to one’s own army and at great cost to the territory being conquered (destruction of buildings, important infrastructure etc…).”
“Secondly, the strong reaction of the Western world has probably been much stronger than what Russia expected. A reality that will undoubtedly make Xi Jinping think about a possible invasion of Taiwan. So if there is a ‘silver lining’ to the dark clouds that have gathered over Ukraine, this is it: the fact that a Taiwan invasion is less likely now than it was a few months ago.”
IO: So what would be the implications for global investment portfolios if such a scenario were to play out in China, compared to now?
Gave: “I don’t think it will happen. But should it happen, wars tend to be inflationary. A war between China and Taiwan would be hugely inflationary for the whole world, because both China and Taiwan are so integrated into the global economy. Much more so than Ukraine or Russia. So the damage to world trade, to supply chains etc…. would be much greater.”
“If I were Dutch, and if I were worried about a Taiwanese invasion (I am neither Dutch nor worried), I would stock up on bicycle parts now, because in our modern world all the top-end bicycles are made in Taiwan and the cheap parts in China. A Taiwanese invasion might make it difficult for Dutch people to keep cycling through Amsterdam!”
IO: How difficult is it for investors to get out of Chinese stocks and bonds, and how much more difficult than getting out of “Russia”?
Gave: “At the moment there are no liquidity problems on the Chinese markets. But in case of war, who knows? As I said, there is an important difference between Taiwan and Ukraine: Taiwan is legally not a sovereign nation. So the scope of the sanctions may not be so great?”
IO: In the first three months of 2022, investors massively sold off Chinese stocks. What do you think are the causes? Does a scenario sketch like the one above play a role in your opinion?
Gave: “Absolutely. Foreign investors who had burned their money in Russia were afraid that a similar scenario would unfold in China. Not that the news in China was all that great to begin with: economic slowdown, further lockdowns, crackdown on big tech etc.”
IO: How can investors properly (or better) deal with a risk like this in their portfolio? Should they do so at all, in your opinion?
Gave: “For all the above reasons, this is not a risk that keeps me awakeI lie awake at night. I think there are enough real risks already (energy crisis, food crisis, immigration crisis, real question marks about the viability of the EU institutions, rising inflation) without us having to worry about the impact of a potential crisis with a very low probability.”
“Anyway, one of my core beliefs is that my clients pay me, as a money manager, to adjust their portfolios to the underlying conditions. Not to make predictions. Adjusting is hard enough, especially with all the moving parts mentioned above!”
This article originally was published on InvestmentOfficer.nl.