Companies that try to play both sides of the burgeoning US-China tensions could struggle to overcome negative publicity, according to J.P. Morgan’s lead investment specialist for macro strategies Nicola Rawlinson.
Despite a recent rise in tensions between China and the West, COVID-19 “has not had a huge impact on China decoupling” – but overall US public views of China have become “considerably less favourable” over the past three years and companies might have some hard decisions ahead of them.
“As we potentially move away from globalisation and towards a world of two poles, companies that try to serve both sides may struggle,” Ms Rawlinson told Investor Daily.
“However, we believe companies focused within each ecosystem may thrive with less global competition. A denouement in US-China relations may also create room for other countries to fill the gap and we observed this in 2019 when ASEAN exports strengthened, benefiting as a substitute for China.”
The ruling Chinese Communist Party (CCP) recently issued a memo calling for closer ties between China’s private sector and the government, raising fears that President Xi Jinping may attempt to exert greater control over the country’s economy.
Separately, Ms Rawlinson noted that economic data from China in recent months has indicated a “V-shaped recovery” with growth likely to be flatter going forward.
“The recovery experienced appears to have been a stronger supply-side response, that is to say, industrial production has been stronger than consumption, which in part reflects the focus of stimulus in targeted areas,” Ms Rawlinson said.
Ms Rawlinson maintains a “fairly strong conviction” that the country’s macro data can continue to evolve positively in the coming months while anticipating a lower rate of growth for the year against recent years, but notes the recent re-escalation of US-China trade tensions and the possible continuation of “aggressive rhetoric” beyond the election.
“However, we do expect the upcoming election to moderate the escalation in the near-term as the US administration will be looking to avoid any negative economic consequences ahead of November,” Ms Rawlinson said.