Powerplay: geopolitical manoeuvres and their corporate impact

18/07/2019

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Geopolitical risk continues to be top of mind for investors, particularly the shifting global balance of power from west to east as showcased by the escalating trade friction between China and the US. Charlie Awdry, China equities portfolio manager and Richard Clode, Global Technology portfolio manager, provide candid views on this evolving issue and its significance on how they invest.

Q: Which geopolitical risks concern you the most?

CA:
There's only one major geopolitical risk dominating China at the moment and that’s the US-China relationship. The focus is on trade but that’s just one element of this deteriorating relationship. Before, there was constructive engagement, now there’s strategic rivalry.
 
We've got friction, both at a trade level, but also at the geopolitical level of trying to influence politics in Asia and globally. The one area that I'm most concerned about is where China has a non-negotiable stance: Taiwan.
 
China sees Taiwan as part of China, but the Taiwanese see themselves as an independent nation with a strong political and diplomatic relationship with the US from which it buys much military equipment.
 
And Hong Kong (HK) where both Richard and I invest is at the fault line of it. HK is dealing with an existential issue of becoming part of China. From a financial/stock market point of view, HK is an avenue for foreign capital, both in and out of China, so on that basis we have to hope it maintains its role.
 
From an investment point of view, we should recognise that Hong Kong offers a lot of offshore capital, Chinese corporates have taken advantage of this and have balance sheets that are multi-currency. So as an investor based in the UK there is a currency risk should the yuan depreciate.
 
RC:
This superpower supremacy rivalry is going to be multi-generational. At the centre of it is technology, the control of it and the national security implications, which is President Trump’s main concern. We saw this with the blacklisting of Huawei (in May 2019 US companies were forbidden from supplying components to the Chinese telecoms giant. A month later it was announced the ban would be eased).
 
If you don’t control your own artificial intelligence (AI), that has huge implications across national security, defence, productivity of your country, surveillance, you name it. Trade is just the battle, the war is this wider jostling for supremacy.
 
 
 
 
Q: Can there be a resolution to the trade war?
 
RC:
Even if there is a trade resolution and China allows foreign technology companies into China, and removes subsidies for local companies to end unfair competition ‒ the enforcement of that will be challenging because ultimately both countries are diametrically opposed when it comes to their goals ‒ the US wants to maintain its current hegemony of power while China thinks that they should be ‘number one’. The two are not going to settle.
 
CA:
I agree. The US and China have different philosophies, different systems. Interestingly in the tech space, there is the development of almost two tech worlds, the US world and the China world. We already have that in the internet. In China, Google doesn't work. Google Maps won't get you anywhere; you have to use Baidu. That kind of ecosystem is something we have to start thinking about beyond just the internet.
 
Q: To what degree is the US-China trade war affecting your investments?
 
RC:
It’s clear that China has been unfair in terms of companies coming to play on a level playing field. Luckily for the Global Technology Team, this hasn’t had much impact on the companies we invest in.
 
This is because the silver lining to that unfair competition is that most of the tech giants like Google, Netflix, or Amazon effectively don’t have a business in China. What we’ve seen with the blacklisting of Huawei, is still how dependent Chinese technology companies are on US technology and US components, particularly semiconductors. Huawei’s entire 5G build is dependent on two US companies, Altera, which is part of Intel, and predominantly, Xilinx. Being self-reliant is a core part of China’s longer-term strategic plans. The negotiating position for the US today is as strong as it's ever going to be. I think China will get more aggressive when they start to become more self-sufficient.
 
And when it comes to semiconductors, Taiwan supplies major clients like Apple, Qualcomm, NVIDIA and HiSilicon (Huawei’s semiconductor division). There are limited alternative suppliers. The Chinese see Taiwan as part of China; as an investor in the semiconductor industry that is a key risk albeit the global ramifications would extend well beyond that.
 
CA:
The bigger picture here is that this strategic rivalry could create slower growth in China because there's less trade. However, China is quite a domestic economy already with consumerism, and there's also a lot of investment.

We also monitor the currency to see if the government lets it weaken to try and boost the economy. Because obviously that’s a headwind for us as we’re sterling-based investors buying yuan-denominated assets and profits.

But in the technology space, companies like Tencent, Alibaba, NetEase, they're not really cyclical. Most people think that China is a trading market, but I think these stocks over the years have been good buy-and-hold companies. Because we are domestic focused, our China portfolios are invested more in the Chinese internet ecosystem than the hardware global supply chain. 
 
Q: Richard, is there a distinction between technology sectors?
 
RC:
I agree, not that many major global tech companies have big businesses in China. There are no software companies that sell much into China, the global internet companies aren't there. So it's really only the more cyclical areas that are affected, such as hardware and semiconductors. We’ve reduced our semiconductor holdings materially in the Global Technology Strategy mainly because in addition to the trade war concerns, the macroeconomic backdrop is deteriorating and inventory levels are high.
 
But the rest, as Charlie said, are mainly domestic-focused businesses. Alibaba (China’s Amazon) is often unfairly used as a proxy for China consumer and trade sentiment; they’re quite comfortable with their long-term (secular) growth trends.

When we talk to global companies like Microsoft we’re told the trade friction doesn't impact them much. It’s not really slowing the secular growth trends of technology, in fact it may even be accelerating some of the technology disruption we’re seeing. What’s exciting is that this desire for self-sufficiency in China may result in many more interesting Chinese technology companies come to market.
 
Q: So with uncertainty you are finding opportunity?
 
CA:
In recent years we’ve seen that most valid macroeconomic concerns tend to get priced into all equities. So even if we are cautious on certain sectors of the market, at the individual stock level we can often find some attractive companies. I think the opportunity in China is for active management, but it's because the environment from the top down is quite challenging, especially when it comes to geopolitical issues.
 
RC:
I would concur with Charlie on the need for active management. With geopolitics dominating the headlines these days we have a much more volatile investment environment. That’s where I believe an active investment manager with expertise and experience can really add some value. For example, the blacklisting of Huawei was a well-flagged risk and we were able to, in advance, reduce our allocation to semiconductors, a sector that would be affected by the ban. We know there are pockets of the market that are much more exposed to potential risk factors than others.

When there’s unquantifiable or unjustified reactions in stocks and markets then you can use that opportunity to buy. We did that at the end of 2018, when cyclical stocks were very weak.
 
Active management allows you to take action in advance of these trends, rather than as a passive investor, you're simply waiting for things to change.

 
 



Glossary

Cyclical business: these companies generally do well in periods of economic prosperity and expansion and less well in periods of economic downturn and contraction.



These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Janus Henderson Horizon China Fund

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors' best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Janus Henderson Horizon Global Technology Fund

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors' best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

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