Election creating shadow over prospects for China

China remains a long-term magnet for institutional allocations and global manager expansion plans but bipartisan U.S. support for a tougher approach to its economic superpower rival could make the months leading up to America's Nov. 3 presidential election unusually uncertain for Chinese assets.

"Spiraling U.S.-China tensions are making some investors reassess their desired exposure" on the mainland now, with a general consensus that "U.S. pressure on China will continue to intensify heading into the election," said Aaron Costello, Beijing-based regional head for Asia with consultant Cambridge Associates LLC.

One executive at a global financial firm with plans to expand its asset management business on the mainland said heightened concerns about geopolitical tensions are putting potential money management deals on ice now as well.

Deals involving U.S. managers on the mainland should pick up considerably after the election, but for the moment no one wants to stick their head above the parapet, said the executive, who declined to be named.

Proposals — seemingly floated every week or so — for new U.S. policies or actions against Chinese companies have proven unsettling for some investment committees, Mr. Costello said. For the most part, however, the response has been "to stay the course or slow down deployments rather than to cut exposures," he said.

In August alone, for example, Keith Krach, the U.S. State Department's under secretary for economic growth, energy and the environment, sent a letter dated Aug. 18 to the governing boards of U.S. universities and colleges suggesting it might be a fiduciary duty on their part to divest their endowment funds' holdings of mainland-based companies ahead of likely moves by U.S. regulators that would lead to "a wholesale delisting of (People's Republic of China) firms from U.S. exchanges by the end of next year."

The day before, meanwhile, the U.S. Commerce Department announced additional steps to limit Huawei Technology Co. Ltd.'s ability to secure the computer chips the Shenzhen-based firm is seeking to pursue its 5G infrastructure rollout.

And on Aug. 6, President Donald Trump signed executive orders banning Beijing-based ByteDance Ltd.'s popular TikTok video-sharing app while barring U.S. persons, on national security grounds, from transactions related to Shenzhen-based Tencent Holdings Ltd.'s WeChat overseas messaging and mobile payments app. That app, together with its ubiquitous mainland counterpart offered by Tencent on the mainland, boast more than 1.2 billion monthly users.

The Hong Kong-listed shares of Tencent — one of the world's 10 largest companies by market capitalization — ended its Aug. 21 trading day at HK$518 ($66.84), down 6.8% from their near all-time high close of HK$555.50 for the session before Mr. Trump's announcement. Hong Kong's Hang Seng index edged up 0.7% over the same period.

Like other social media stocks, Tencent has thrived this year as the coronavirus pandemic found locked-down populations in the region glued to their smartphones. Even after its retreat this month, the company's stock remains up more than 37% from the start of the year.

Market participants say much remains unclear regarding how much bite Mr. Trump's executive order will have, and whether the focus of investors should be on short-term ripple effects or potentially longer-term changes to the fundamental outlook for Chinese companies.

Robert Horrocks, San Francisco-based chief investment officer and portfolio manager at Matthews International Capital Management LLC, said Tencent's messaging apps are so ubiquitous on the mainland and so key to doing business there that U.S. companies could be the biggest losers if they find they can't use them.

A "light touch" by the U.S. would be welcome but with the election looming large, pressure to do something dramatic could be considerable if U.S. policymakers don't want to be seen as "a paper tiger," Mr. Horrocks said.

Morgan Stanley, in an Aug. 9 note about the U.S. move, kept its "overweight" recommendation for the stock, pointing to Tencent's scant 2% revenues coming from the U.S. But it called the potential for the U.S. to sanction more of the firm's businesses or investments a "downside risk," casting a cloud over Tencent's ambitions to grow its smartphone game business globally.

Eng Teck Tan, a Singapore-based senior portfolio manager with Nikko Asset Management overseeing the firm's Greater China portfolios, said many Chinese investors, seeing a considerable amount of short-term political posturing in Mr. Trump's moves, remain poised to buy Tencent's shares should they fall further.

Managers at global firms, by contrast, believe there's broader backing in the U.S. for a more confrontational approach to China, raising the prospect of the global growth prospects for Chinese social media and technology heavyweights being more constrained over time, Mr. Tan said.

"Anti-Chinese sentiment in the U.S. is bipartisan and may not meaningfully improve after November, regardless of who wins," said Cambridge Associates' Mr. Costello, predicting "the tone, tenor and tactics may change, but not the substance."

U.S.-China relations have been "fundamentally reset," and should remain "a bit more confrontational — certainly much more focused on longer-run, strategic tensions," agreed Robert Gilhooly, who joined Aberdeen Standard Investments at the start of 2020 as senior emerging markets research economist after a decade with the Bank of England focused on China macroeconomics.

Still, he said, a Joe Biden presidency would likely be "less erratic in its policy setting (and) a bit more multilateral as well."

Mr. Tan said a continuation of tougher U.S. policies toward Chinese companies won't matter greatly over the coming few years but over the longer term, when expansion overseas would be an increasingly important source of growth, it could weigh on the valuations investors are willing to pay for leading Chinese technology companies.

Some asset owners contend that heightened political sensitivity isn't confined to U.S.-Chinese relations.

The political tensions and geopolitical issues cropping up now are "not only about technology investment in China but … (apply) to a lot of investments globally" — part of the discussion for every single investment whether in Europe, Canada, the U.S. or China, said Suyi Kim, Hong Kong-based senior managing director and head of Asia-Pacific with the C$434.4 billion ($324.5 billion) Canada Pension Plan Investment Board, Toronto, in an Aug. 18 panel discussion sponsored by FCLT Global.

Still, market participants agree that geopolitical frictions between the U.S. and China carry outsized risks for the global economy.

"The two economies that matter in the world are clearly the U.S. and China (and) there's a huge level of economic interaction between the two," said Phillip Nelson, a Boston-based partner and director of asset allocation with NEPC LLC.

The question becomes, "how do the two countries manage their economic growth, knowing that both countries are working together and competing with one another," Mr. Nelson said. U.S. moves to make changes to how the two countries are linked economically — a risk "that will likely ebb and flow through time" — will have an outsized impact on investor sentiment.

Some see that competition leading to spheres of influence.

"We're inevitably going to see a Balkanization of services and eventually of the internet itself," fragmenting hardware, software and the service ecosystem, said Jeremy Wagstaff, a technology writer and author of the loose wire blog. This may not matter much for the next year or so because people aren't traveling much but eventually — as and when the health crisis subsides — it will, he said.

Even so, some asset owners say tech and social media firms will remain interesting to investors even if global expansion becomes harder.

Chow Kiat Lim, the CEO of Singapore sovereign wealth fund GIC Private Ltd., speaking on the FCLT Global panel, said setbacks to the free flow of capital due to geopolitical tensions and fragmentation would be a challenge, but "the world is pretty big (and) even if you are confined to a particular region, it's still pretty big, there's still a lot of room" and a lot of competition.