As tensions between the U.S. and China tick higher, investors are weighing the chances of a potential U.S.-China economic decoupling—and what it might look like.
In this Thoughts on the Market series, Michael Zezas offers perspective on how U.S. public policy affects equity and fixed income markets, including trade tensions, infrastructure and government policy. Listen to this week’s update.
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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, July 29th at 11:00am in New York.
Tensions between the U.S. and China continue to tick higher. Already this year, we've seen the U.S. decertify its classification of Hong Kong as an autonomous region. Last week saw each country take a turn at closing one of the other's consulates. The tensions included an indictment by the U.S. of two Chinese nationals accused of trying to steal COVID vaccine data from U.S. companies. It's just the latest in the trend of deterioration in the relationship between the U.S. and China, which investors fear could have substantial economic and market ramifications given their interlinked economies.
It's a valid concern, but it's something we expect to play out in a nuanced way over the medium term and focused on specific sectors of the global economy, as opposed to a hard, abrupt, and complete economic decoupling. For example, tariff escalation in 2018 and 2019 brought the global economy to the brink of a recession. But this year's escalations have been driven by non-tariff actions with sector specific ramifications, such as export restriction controls on semiconductor equipment. Actions like these impact the semiconductor sector, but left little evidence of impact on the broader markets or macroeconomic trajectory.
Fortunately for investors, we have a plan for this trend, one we detailed in a recent Morgan Stanley BluePaper called "Investing for a Multipolar World." A multipolar world is one in which there are more than two standard setters in global rules and norms. And we argue that in key sectors the U.S. and China are, intentionally or not, in the process of creating separate spheres of influence. So this means investors can plan accordingly by identifying sectors where the U.S. and China have mutual interest in decoupling, then see which companies this creates opportunities for and which companies this creates new costs and headwinds for. As an example, we see opportunities in Asia tech and European telecom, areas where currently dominant global competitors may be increasingly boxed into domestic markets. Conversely, there could be challenges in the auto sector, where technological advances in automobiles could increasingly attract government restrictions on where companies can locate supply chains and sell their product in the name of protecting intellectual property that is deemed essential to national and economic security.
And if you think this trend might not be worth your time because the U.S. election might yield a result that eases tensions with China, don't. Regardless of the outcome in November, we don't think this trend toward a multipolar world is going away.
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