Clamping down on China has become a bipartisan effort in the United States, but I believe an outright conflict between China and Taiwan is a low-probability (albeit high-impact) event—and I remain constructive on the bottom-up, long-term investment opportunities in China, including the transition to a domestic-consumption-driven and lower-carbon economy.
Learn more by watching our Just a Minute videos or reading the transcripts below. And read Vivian’s 2023 outlook: China Reopening Should Drive Growth.
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There’s no doubt we are in a rising geopolitical risk environment on the global level. Clamping down on China has become a bipartisan effort in the United States.
This creates a risk factor for investors that has little to do with fundamentals. If you look at restrictions on semiconductor sales to China, for example, China could deal with the problem technically and practically over time, but it does raise bigger concerns about the investability of Chinese equities.
A U.S.-based investor has to ask whether the U.S. government may eventually put China-based tech companies on the restricted entity list.
China-Taiwan Conflict is Likely A Low-Probability Event
We believe that the China-Taiwan conflict at this point stays as a low-probability but high-impact event.
If there were conflict happening to those two countries and regions, the impact is going to be more widespread, not just to China and Taiwan, and the industries that are impacted will be also very broad-based.
We believe that the risk premium of Chinese equities and certain Taiwanese equities will have to factor in the rising geopolitical risks.
But other than that, we’ll continue to focus on the fundamental cycle considerations, and then figure out the best risk-reward metrics for the companies we invest in.
Energy Transition Could Be a Chinese Growth Story
A long-term structural story we like a lot is energy transition, including electrical vehicle batteries, solar panels, and related companies.
These higher-valuation segments underperformed traditional energy companies in 2022, but we remain bullish on the long-term opportunities related to the transition to a lower-carbon economy.
We pay close attention to fundamental corporate earnings, which are already in recovery. If you combine the earnings recovery with attractive valuations and a stabilizing regulatory environment, plus reopening and policy support, 2023 may be a good year for quality growth investors.
Vivian Lin Thurston, CFA, partner, is a portfolio manager on William Blair’s global equity team.
