US President Donald Trump isn’t stopping at trade and currency wars. He’s weaponizing capitalism itself to make China bend to his will.
His latest threat is to de-list Chinese companies from US exchanges and force US index companies like the MSCI and Standards & Poor’s to remove or exclude China-based entities from its global benchmarks.
The move could also dismantle a capitalist system that is built and championed by the Americans!
No matter whose side you’re on in the US-China trade and everything else war, Trump’s latest thought bubble (if it comes to pass) will have the most profound implications for ASX investors that extends beyond tariffs and exchange rates.
The new contagion threat
This is because the divorce will be very costly to global investors. They will likely have to take big losses on their holdings of Chinese US-listed shares they directly own or indirectly hold through a fund (such as an index fund).
We are already seeing some signs of this with shares like the NASDAQ-listed Alibaba Group Holding Ltd crashing 5.2% on Friday.
The infection will spread. The question that every investor will be forced to ask is, who’s next? Whenever a country can’t get along with Trump, will that nation’s companies be barred from the world’s largest capital market?
The list can grow quite long and may even extend beyond emerging countries as Trump can’t seem to make friends with Canada or many European nations.
How can investors have the confidence to invest if countries can be arbitrarily excluded from indices which global funds rely on to allocate capital?
The unintended consequences of the delisting threat, again if it grows beyond a thought bubble, is that non-US rivals to MSCI and S&P could find new relevance.
Defensives to outperform
Coming closer to home, defensive stocks will likely outperform high-flying growth stocks like the WiseTech Global Ltd (ASX: WTC) share price and Afterpay Touch Group Ltd (ASX: APT), should Trump take another step towards carrying out his delisting threat.
But as I found out the hard way during the GFC, not all defensives are defensive in a financial crisis. Popular stocks like the Sydney Airport Holdings Pty Ltd (ASX: SYD) share price and Transurban Group (ASX: TCL) share price may not provide much cushioning as inbound tourist numbers are likely to tumble while a weakening domestic economy will impact on traffic numbers on toll roads.
One of the safest places on the ASX to be is gold. While some experts think shares in our gold producers are overstretched, the reality is that the gold price could have a long way more to climb given that the precious metal hit a high of around US$2,000 an ounce during the GFC and is about 25% off that peak.
A case may also be made for some electric and gas infrastructure owners now that the sector has learnt not to over leverage or use complex ownership structures in the aftermath of the last financial crisis nearly a decade ago.
Having said that, if equity markets go into a free-fall, just about everything will be indiscriminately sold.
Let’s just hope US and China don’t take us to the brink.
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Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and WiseTech Global. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.