The world stage is fraught with political risk as governments face the enormous challenge of restoring economies after the damage wrought by the coronavirus pandemic. For Asia, notably China, a rise in protectionism and a desire for local supply chains will hinder countries’ scope to export. Within Asia, there are a number of tensions bubbling, mostly around China’s borders, all posing geopolitical risks.
International trade risks
The pandemic has fanned the flames of the US’s distrust of China, threatening to break the fragile ‘phase one’ truce in the Sino-US trade war. Since 2018 China and the US have been embroiled in a tit-for-tat tariff war, led by US President Donald Trump, who wants to address the trade imbalance between the two countries.
The result is that Chinese exports to the US fell by 16 per cent last year, and its economy expanded at its slowest rate since the 1990s. Anti-China sentiment is also stirring in other countries. Boris Johnson is under pressure to ban Huawei’s involvement in the UK’s 5G network, where it is currently subject to a 35 per cent cap. The new ‘technology cold war’ will have global damaging effects as it risks slowing important technological innovations.
But some countries in Asia, such as Taiwan, India and Vietnam, have benefited from companies moving their manufacturing plants out of China. For example, in the first half of 2019, Vietnamese exports to the US rose by more than 30 per cent. But these benefits have since been dashed by coronavirus. Asian manufacturing hubs have suffered both from temporary factory closures and from a drop in demand for their products. Countries that rely heavily on exports will be vulnerable to a protracted drop in international demand and any movement from governments to localise their supply chains. The table below shows how Southeast Asian countries in particular are vulnerable to curtailment of international supply chains.
Exports & imports
| Goods and services | ||
| Exports | Imports | |
| % GDP | % GDP | |
| China | 19.50% | 18.70% |
| India | 19.70% | 23.60% |
| Thailand | 66.80% | 56.50% |
| UK | 30.00% | 31.80% |
| US | 12.20% | 15.30% |
| Vietnam | 105.80% | 102.50% |
| Source: World Bank | ||
Tensions within Asia
Asia has a long record of political turbulence, which can slow economic activity and lead to a flight of capital. Governments tend to be more authoritarian and more corrupt than in the West, which has historically proved a tougher environment for capital markets. The table below comes from Transparency International’s Corruption Perceptions Index, which ranks 180 countries and territories by their perceived levels of public sector corruption, according to experts and business people. The index is ranked out of 100 with higher numbers representing lower corruption.
Corruption Perceptions Index (CPI)
| Country | CPI 2019 | CPI 2014 |
| China | 41 | 36 |
| India | 41 | 38 |
| Thailand | 36 | 38 |
| UK | 77 | 78 |
| US | 69 | 74 |
| Vietnam | 37 | 31 |
| Source: Transparency International | ||
Hong Kong hosts a major international stock market and China’s attempts to impose a national security law on the region could spell the end of the municipality’s unique freedoms. While this poses serious threats to the democratic rights of Hong Kong’s citizens, China is likely to want to uphold Hong Kong’s status as a gateway to foreign markets. In any event, Hong Kong’s percentage of Chinese GDP is now under 3 per cent, down from over 18 per cent when it reverted to Chinese rule in 1997.
A flare-up in tensions between China and India on the Himalayan border this month threatens both countries’ economies. India imports more goods from China than from any other country and Chinese tech giants have invested heavily in India’s start-ups. Growing anti-China sentiment in India has already led to calls for a boycott of Chinese products and services. This could have serious consequences for economic growth in India.
Taiwan continues to be used as a political football between the US and China. Taiwan’s President, Tsai Ing-wen, won a landslide victory in January this year, which was widely seen as a referendum on the future of Taiwan and its relationship with China. Washington has upgraded its strategic ties with Taiwan in an effort to protect western-led order in the Pacific. Taiwan’s economy is heavily dependent on China, so it must be careful or it risks becoming collateral damage between the US and China.
Shift in trends
Corporate governance and transparency can be weak in Asia, providing a murky landscape for investors. But the investment landscape is improving. After the Asian financial crisis of 1997, Asian countries have seen the merits of trying to improve capital markets.
According to JP Morgan, shareholder activism increased at a compound annual growth rate of 48 per cent between 2011 and 2017. Regulations have been introduced to promote shareholder accountability and have in many cases been seen by investors as an opportunity to unlock value. China has accepted that opening capital markets is necessary for it to fulfil its ambition of being the world’s largest superpower and consequently the stock market has met encouragement from the government. This should boost productivity within China’s vast domestic economy.
While countries in Asia are embracing freer markets, the US, Europe and the UK are to an extent moving in the other direction. Increasing regulations in the West can stifle the potential for shareholder profits. And extreme monetary measures have uncertain implications for interest rates, inflation and growth.
Valuations
| PE | PE Fwd | |
| Stock Index | (12 mths) | (12 mths) |
| MSCI Asia ex Japan | 14.61 | 13.33 |
| MSCI Europe | 15.04 | 16.3 |
| MSCI UK | 12.1 | 14.44 |
| MSCI USA | 22.43 | 21.99 |
| MSCI World | 19.25 | 19.49 |
| Source: MSCI, 29 May 2020. | ||
| Indices capture large and mid cap | ||
Read all nine elements of our Investing in Asia guide here:
The outlook for Asian economies
