Singapore hedge fund boosts cash on growing risk of US-China armed clash

[SINGAPORE] 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 US and China.

In the lead-up to November's US presidential election, APS Asset Management 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 Wong Kok Hoi.

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, Mr 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 Mr Wong, whose firm manages about US$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, he sees armed conflict as possible rather than probable and still holds stocks that could tumble if fighting broke out.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

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 per cent 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 US-China relations until a vaccine is widely available.

But Mr 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 US dominance and leads to conflict.

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

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

But Mr Wong added that if China is able to match America's gross domestic product, which could happen sometime between 2025 and 2029, the US 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.

BLOOMBERG