What does the America-China relationship mean for investments?

It’s been a busy few weeks across the pond, particularly with regards to the America-China relationship. In uncertain times, sometimes it’s best to focus on a single, knowable thing. After all, they say if you’re seasick you should focus on a point on the horizon. Perhaps the point on the geopolitical horizon could be the America-China relationship. It’s certainly at a pivotal point. If things go well, your portfolio could benefit. If not … well, there are lots of other opportunities out there.

An unbeautiful friendship

Let’s look at what is arguably one of the world’s most important relationships – and what it means for your money.

Of course, we’re talking of America and China. In a previous article we peeked through the American lens. Now we’re looking from the other side of the Pacific.

We covered China last year. But, we think it merits another look, not least given developments in America.

Why? Trade is as good a reason as any. Today, China is a vital export market for U.S. goods and services, while America is China’s top export market.

The countries invest in each other too. Just before Trump’s first presidency, Chinese investments in the US increased almost exponentially to a peak of $31bn. Americans send a lot more money the other way.

So what?

Well, the way these trends are evolving can affect your portfolio, for good or bad.

If you have a more cautious approach, you may have a fund that invests in less risky, large companies. It’s likely that three quarters of this money will be in American firms (with next to nothing in China – at least directly).

A more adventurous approach would dial up your exposure to emerging markets. Maybe a quarter of that will be Chinese (with potentially nothing directly in America – but certainly indirectly, given the volume of trade).

Like a WhatsApp group, this relationship ripples across a much wider circle of participants. Including the UK economy – and participants in it, like you.

Fragile China?

China is in a strange place, investment-wise.

This is the Shanghai stock market, over the last five years.

Talk about volatile. They had a massive property bubble, which burst in 2021; the government managed to stop the rot after a few years; then the American election led to more wobbles.

It’s not all bad of course. Chinese bonds offered a steady-eddy 4% annual return over the same five years. The Chinese government knows the importance of paying back its lenders – so it’s hard to see them defaulting, like Greece in 2015 or Russia in 2022.

And there’s a strong case for the nation over the long run. It’s the second largest, with the second largest population. It has one of the fastest growing economies. It’s also the second largest stock market, after America. Heft often matters in finance.

Lastly, the evidence says emerging markets (which include China) tend to give you a better return over the long run than developed markets. There’s loads of information to support this – the chart below (created by dragging the time scale to 1987) being one of many available.

Source: Longtermtrends

Delicate Chinese-American relations

Add all these up, and it’s reasonable to assume China will continue offering bright spots and opportunities over your savings journey.

In the meantime, we can potentially expect a bit of a bumpy ride.

For example, American talk of slapping super high tariffs on Chinese goods and services was enough to send the renminbi into a 16 month low against the dollar. Action may have an even worse effect.

If America goes more protectionist, this will hurt China’s currency more – hobbling its international purchasing power, and impeding investment returns.

One scenario sees both nations losing: less co-operation, more trans-Pacific pot shots. Such an environment wouldn’t bode well for savings, irrespective of your caution or adventure.

But, we like to look at the evidence and prefer to think about managing risks and taking opportunities.

Rachel Reeves does too. Say what you like about her, but at least she’s been promoting Britain to one of the most powerful nations on earth.

In terms of opportunities you can take, the fund managers we use are terrific at, for example, putting your money in companies with good value share prices. They are financial bargain hunters if you will. Some of these will be in China – or Chinese-influenced companies.

They’re also good at allocating away from patches where prices have got high, or prospects for economic growth appear tepid.

So, we’re anxious about the state of the world – we suspect you feel the same.

But we’re also confident on the evidence – about how your wealth will perform – and hope you are too.

Please get in touch on hello@firstwealth.co.uk or call 020 7467 2700.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.