Hedge Fund Boosts Cash on Growing Risk of U.S.-China Armed Clash


As investors grapple with the relentless rise in global coronavirus cases, one Singaporean hedge fund is preparing for another dire event -- the possibility of an armed clash between the U.S. and China.

In the lead-up to November’s U.S. presidential election, APS Asset Management Pte. is increasing allocations to the relative safety of cash, along with stocks that would weather an outbreak of hostilities, said founder and Chief Investment Officer Kok Hoi Wong.

Recent tit-for-tat consulate closures were merely the opening salvo and there’s a chance that political posturing during the election campaign could peak with American forces triggering an altercation in the South China Sea, Wong said, without elaborating on how he sees that occuring.

Investors have underestimated tensions between the two superpowers, he said. The S&P 500 Index has risen slightly this year even as the Covid-19 pandemic ravages the global economy.

“If there’s some form of military conflict it will not be full-blown war but an isolated, small-scale conflict,” said Wong, whose firm manages about $2.5 billion. “But markets will panic and crash so we don’t want to position our portfolio too bullishly or aggressively.”

To be sure, Wong sees armed conflict as possible rather than probable and still holds stocks that could tumble if fighting broke out. The amount of hard currency for each of the firm’s clients and funds varies depending on mandates -- at most, some accounts hold about 15% cash -- up from the low single-digits that would be the case in more normal times.

And he thinks the pandemic’s impact on the economy will be a bigger factor than U.S.-China relations until a vaccine is widely available.

But Wong’s comments are in line with his long term thesis -- that the clash between both nations isn’t based just on trade disparities. Instead, he sees something akin to the Thucydides Trap emerging, where the rise of a new superpower like China threatens U.S. dominance and leads to conflict.

One of the biggest mistakes investors made was to bet tensions could be resolved by leveling the trade imbalance, Wong said. As such, he’s pulled back on U.S. businesses that are heavily reliant on sales in China, and favors domestic firms that supply Chinese consumers such as liquor maker Kweichow Moutai Co. and cybersecurity outfit Venustech Group Inc.

His APS China A Share fund, which manages about $400 million, is up 29% this year -- almost double the CSI 300 Index’s gain.

But Wong added that if China is able to match America’s GDP, which could happen sometime between 2025 and 2029, the U.S. might shift from a strategy of containing China to one of co-existence.

“For as long as Americans feel that China is lagging behind them in terms of military might or economic power, this rivalry will continue,” he said.

©2020 Bloomberg L.P.

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