Navigating the Geopolitical Minefield: The Impact of the US Election on Chinese Stocks

The looming US presidential election is adding to a slew of headwinds for Chinese stocks, as both candidates use hardline rhetoric on economic policy towards Beijing. The debate between US Vice President Kamala Harris and former President Donald Trump highlighted their shared stance of a tough approach towards the world's second-largest economy, with potential implications for technology restrictions, tariff hikes, and ongoing geopolitical tensions.

Bracing for Uncertainty: The Fate of Chinese Stocks Hangs in the Balance

The Debate's Fallout: Exacerbating Negative Sentiment

The fallout from the debate may exacerbate negative sentiment towards China's $8 trillion stock market, where the benchmark CSI 300 Index has slumped to its lowest level in more than five years. Concerns about a dire growth outlook have overshadowed the regulatory efforts to prop up the market, with the gauge surrendering all of the gains sparked by direct state buying of stocks and exchange-traded funds earlier this year.

Diverging Paths: The Impact of a Harris or Trump Victory

The outcome of the election could have significant implications for Chinese assets and the economy. A Harris victory would likely mean the continuation of the Biden administration's targeted tech restrictions, posing further challenges for China's tech supply chains. Conversely, a Trump win could lead to a near-term surge in Chinese exports, followed by a decline as the former president's fundamental policy of all-out tariffs takes effect. In either scenario, China will need to implement more active domestic policies to counter the fallout.

Geopolitical Tensions: A Persistent Headwind for Chinese Stocks

Regardless of the election outcome, geopolitical tensions will continue to haunt Chinese stocks for another four years, according to Daiwa Securities Group. The House of Representatives' recent approval of a bill that would ban federal contracts with Chinese biotech companies is a testament to the ongoing tensions between the world's two largest economies, sending shares of Wuxi AppTec and Wuxi Biologics plunging in Hong Kong.

Investor Uncertainty: Sidelined Amid Geopolitical Risks

The uncertainty surrounding the US election and future US policies towards China are keeping investors on the sidelines, according to a research note from US asset-management firm Cambridge Associates. Investors are advised to hold Chinese equities in line with their portfolio benchmark weight, as a sustained rally in Chinese stocks would require a rebound in domestic confidence and demand, particularly in the battered property and consumer sectors.

Diverging Fortunes: Chinese Stocks Under Trump vs. Biden

Chinese stocks have taken a beating since Biden took office in January 2021, with the CSI 300 Index and the Hang Seng Index both tumbling 42% in that span, making them the worst performers among the world's major benchmarks. In contrast, shares in mainland companies fared better during Trump's term from 2017 to 2021, with the CSI 300 rising 65% and the Hang Seng gauge gaining 30%, although both underperformed a 70% advance in the S&P 500 in the period.

Navigating the Uncertainty: Strategies for Investors

To ride out the uncertainty of the US election, the best strategy may be to buy into the stocks that are able to deliver stable dividend payouts, according to UBS Group. The Swiss bank's Hong Kong-based head of China strategy, James Wang, recommends a high-dividend yield strategy as a core portfolio, with beta options in the form of internet, property-related sectors, education, and semiconductor equipment.