American philosopher Sidney Morgenbesser was once asked if he agreed with the idea that a statement can be both true and false at the same time. “Well,” he replied, “I do and I don’t.” By the modest standards of high-brow gags, it is a pretty good line. Perhaps we should bear it in mind when pondering the implications of recent talks between Xi Jinping and Donald Trump.
As is customary, Xi was less than expansive in the wake of the pair’s long-awaited face-to-face in October. Even Xinhua, China’s official news agency, mustered only a typically nebulous quote: “We have the confidence and capability to navigate all kinds of risks and challenges.” Meanwhile, as is also traditional, Trump was highly effusive. Speaking aboard Air Force One on the journey home, he rated the encounter a “12-out-of-10” and declared: “It was an amazing meeting.”
On the one hand, this assessment may well be true. Getting the leaders of the world’s two largest economies in the same room had appeared a distant prospect mere weeks earlier. The spectacle was certainly a long way removed from the various threats exchanged since the US’s “Liberation Day” tariffs sparked a trade war back in April.
On the other hand, Trump’s evaluation could just as easily be false. On balance, the upshot at present seems less a fully fledged deal and more a temporary truce. Although relative calm prevails for now, we all know how rapidly economic and political accords can unravel.
I guess Morgenbesser may have had a point after all. Yet I would dare to suggest one unequivocal truth emerged from the Xi-Trump showdown: China is an investment destination that merits the attention of anyone seeking sensible portfolio diversification.
Understanding China’s edge
In my opinion, the whistle-stop mini-summit in Busan delivered a marked demonstration of China’s strength. Both sides were no doubt keen to compromise, but Washington’s determination to enter into a marriage of convenience may have been greater than Beijing’s.
One reason why is that markets represent Trump’s Achilles’ heel. The President appreciates his standing in the polls – and, by extension, his mandate – is very much at the mercy of economic performance. The picture in China is somewhat different. There are limited institutional mechanisms by which the population can express its discontent in the face of hardship – whether actual or perceived.
By way of illustration, take Chinese real estate. It has been in a bear market for several years, yet the political repercussions have been minimal. Market twists and turns do not decide elections in China.
Xi holds a further trump card – excuse the pun – in the form of his country’s increasingly acknowledged pre-eminence in a number of fields. China has an edge over the US in the likes of energy generation, renewables and, most obviously, rare earths. It also has its own ever-strengthening ecosystems for artificial intelligence and other game-changing technologies.
As we have seen, all this means it has plenty of leverage when dealing with its fellow superpower. Numerous commentators have claimed it was the US that blinked first – as well it might, given that its attempts to severely stress-test China’s economy came to virtually nothing.
There is also a broader inference here. Many investors have long taken the view that China would essentially decouple from the global economy, but events in Busan underlined that it fully intends to remain integral – and preferably at centre stage.
The appeal of Chinese smaller companies
These may be key considerations in an era when so many investment portfolios are conspicuously US-centric. I am not implying the US is heading for a fall, but I do believe the argument for sensible diversification is becoming ever more compelling.
So, where in China might investors turn their attention? As is the case in many Asian economies, smaller companies can offer an especially diverse set of opportunities. The best of these businesses are established, listed, of high quality and capable of long-term growth. They usually have a market capitalisation of below £5 billion.
Crucially, most are under-researched. As a result, they are consistently overlooked by mainstream Asian funds and indices. This is why on-the-ground insight can make a big difference. A fund like ours relies on local knowledge, in-depth analysis and direct engagement to uncover China’s hidden gems. They include companies that are domestically focused, companies with global ambitions and companies that already have a far-reaching presence.
It is worth noting that many of these businesses are largely immune from the ripple effects of international tensions. Frankly, whether the Xi-Trump get-together was a genuine 12-out-of-10 or no more than a fleeting flirtation with détente is of strictly limited consequence to them.
This highlights a final important truth: the macro backdrop may help set the tone, but it is a company’s unique attributes that really count in the end. When it comes to ticking the right boxes from an investment perspective – with apologies to Sidney Morgenbesser – they either do or they don’t.
Gabriel Sacks is co-manager of the Aberdeen Asia Focus trust. The views expressed above should not be taken as investment advice.