Geopolitical fears cause reversal of 20-year trend

Geopolitical fears are forcing countries to reverse a 20-year global trend and seek self-reliance rather than rely too heavily on China, according to Man GLG fund manager Andrew Swan.

Speaking to Money Management, Swan, head of Asia-ex Japan equities, said Asian investors needed to examine the geopolitical tensions in the region. 

“Geopolitics is a risk, countries are dividing rather than uniting. This will culminate in geopolitical risk, which is not a good position and it will continue to deteriorate and could last many years.”

Referencing the tensions between former US President Donald Trump and Chinese premier Xi Jinping, Swan said there had no let-up in these tensions since the election of President Joe Biden, rather that Biden had been less vocal on social media about the tension.

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“The US/China trade tensions are not good and have been deteriorating for some time. Biden’s policy are an extension of what Trump had been talking about, the rhetoric depends more on the different leaders! 

“It is a clash of empires, both countries have stuff that the other country needs but they have different political systems. They are reliant on each other but they don’t want to be.”

Swan said this divide was reflective of wider geopolitical tensions where countries were opting to be more self-reliant in order to diversify away their geopolitical risk. This was a decision exacerbated by the invasion of Ukraine in 2022 when many investors and businesses opted to exit their exposure to Russia.

“20 years ago, the world was integrating but now they are looking to be more self-reliant and self-sufficient. It is about de-risking even if it means it comes at a higher cost. For 20 years, it has made sense to put it all in China but now they have had a wake-up call and they don’t want to risk being cut-off by geopolitical tension.

“People are moving production to other places like Indonesia or Mexico in order to diversify as they realised they had too much exposure to China. That comes with higher costs but it is worth it because of the risk of not diversifying and having all your eggs in one basket.”

This had been a positive for South East Asia where the economies were faring well thanks to a lack of rising inflation, excess of labour, stable politics and a young population. Swan added these types of markets would look attractive as Australia felt the impact of rising interest rates come through.

“If you want to diversify away, South Asia is definitely a candidate, stable and supportive whereas Australia is facing risks to its domestic economy.”