A US-China cold war could be good for investors, after all

A stock analyst who gained attention for emphasizing the theme of inequality a decade-and-a-half ago is now promoting the idea that U.S.-China showdown for economic supremacy could prove a boon for investors.

The escalation in U.S.-China tensions since President Donald Trump took office in 2017 has largely been viewed as a negative by traders. And headlines announcing fresh tariffs or other protectionist moves by either country have roiled equities on any given day — though they didn’t prevent global shares from hitting record highs before the coronavirus crisis.

Ajay Kapur, head of Asia and global emerging-market strategy at Bank of America, says that the rivalry could have many benefits, particularly in driving investment and innovation. Stronger productivity gains would help propel investment returns in a variety of assets, he wrote with colleagues in a June 7 report.

“For equity investors, especially growth investors, the seeds of new military-civilian technologies that are germinating today will be irrigated by the full-blown great power rivalry, and blossom in unknown ways in the coming decades,” Kapur wrote with colleagues Ritesh Samadhiya and Aritra Baksi.

The team cited historical examples such as rivalry between the U.K. and Germany in the late 1890s to early 1900s, along with the U.S.-Soviet conflict, as periods when big rivalries acted as a spur for technological development.

Among the investment implications of a reduced emphasis on global supply chains and increasingly nationalistic strategic policies from the world’s top two economies, the Bank of America strategists highlighted the following:

“Technology is the biggest winner,” they wrote. Robotics, space research, cybersecurity and artificial intelligence along with semiconductor makers and chip designers are “logical” candidates.

Asian equities in particular, with their “technology bias,” are likely winners, they argued.

Government bond yields will be kept low, so aren’t likely to be good hedges for equity portfolios, they wrote. Cash could be a “temporary fix,” though gold and blockchain-based currencies could take a bigger diversification role, they wrote.

Media firms will play a role in the communications war, and patriotic and nationalist-leaning ones could benefit, they wrote.

Defense and financial-technology providers should be other beneficiaries, they concluded.

“Two competing great powers, using the government balance sheet and zero real interest rates from the savings glut” generated by the ultra-wealthy and high-savings societies such as Japan, Kapur and his colleagues wrote. Kapur in the mid-2000s used the term “plutonomy” to describe economies with increasing inequality.

“Re-shoring, reinvigorating these domestic supply chains and creating domestic upstream suppliers in critical technologies is likely in both the U.S. and China,” the Bank of America team wrote. “Tomorrow’s iPhone, a substantial beneficiary of military research, is probably incubating in military-financed research labs or projects.”

Source: Bloomberg