Geopolitical Risk
Much like the stock market, our world is rarely predictable. Moreover, not everyone is nice to each other all the time! If you haven’t realized, there is a lot of conflict going on in the world. And sometimes, this indecency will leach into your investment portfolio.
What Inspired This Article
Though not strictly the subject of this article, the incident which inspired it was the case of Kumtor mine in Kyrgyzstan. This is a mine owned and operated by a Canadian company called “Centerra Gold”. On paper, it seemed like a value play. A low P/E ratio of about 5, good revenue, a dividend, etcetera.
However, the real world doesn’t operate on paper. Last month, the government of Kyrgyzstan decided they had had enough with Centerra and how they were operating. They alleged environmental concerns, risks to health & safety, and unmet obligations. A bill was soon passed which allowed the Kyrgyzstani government to take control of the mine. Later that month, they did just that.
The government rolled in and took control. Just like that, the mine was nationalized and remains in the control of the Kyrgyzstani government. It goes to show that, at least in the short term, might is right. It also shows that it is vital to understand the local politics of the region of operation, and local concerns.
China Delisting
The Kumtor incident reminded me of the late 2020 delisting of some American-listed Chinese corporations, in that it was a prime example of geopolitical risk. In November 2020, the US Government delisted some China-based securities which were allegedly tied to the Chinese Military (Chinese People’s Liberation Army). And these weren’t companies with names like “China Weapons Inc.” or “China Fighter Jet Ltd”. No, instead they were companies in the Communications industry, the Energy sector, among others. Companies you never would’ve guessed had an (alleged) connection with the PLA.
Investing Lessons to Learn
So… what can we learn from these examples? It is important to stay aware of geopolitical risk when investing. And, currently, the most prominent geopolitical battle is between the USA and China. In case you thought that “investment bans” were only a Trump thing, know that Joe Biden is continuing this practice.
As recently as last week, Biden expanded the list of companies banned from trading on American exchanges. This is important to know as a Canadian because the easiest way that Canadians can invest in (most) Chinese companies is via the American exchanges.
It is very important to understand why these companies are being banned. The official reasons put forward by the United States government are because of alleged involvement with the Chinese Military (PLA), and/or alleged involvement in imprisoning the Uyghur population in North-West China (an ongoing human rights issue). However, some suspect that Chinese Technology companies could get tied up due to the ongoing chip wars wherein the USA and China (among others) want to secure access to the most powerful computer chips.
Should This Stop You from Investing in China?
It depends on how well you understand the situation. I find many of the Chinese companies listed on the American exchanges are currently priced very well compared to their American counterparts. I also find the dividends offered by some Chinese companies very appealing. Moreover, China is forecasted to experience (slightly) greater economic growth this year than Canada and the United States.
Ask yourself: is it worth the risk? At the end of the day, you have to make that decision for yourself. As for me, I would ask myself:
- Is this company tied to the PLA?
- Is this company involved with, or are its products being used in, the Uyghur detention camps?
- Is this company involved in the chip wars (especially companies with operations in Taiwan)?
Fortunately for us, China is a very large country and you can find numerous American-listed Chinese companies which do not engage in any of the above.
I would also keep a very close eye on how the recently passed “Holding Foreign Companies Accountable Act” is enforced in the near future. Phew… that is a lot to worry about!!
We can only hope that the Biden administration will clarify which stocks can be delisted and allow investors like you and I some peace of mind. Pay attention for this in the coming months.
One good thing that comes of this is that it makes people consider what the companies they are buying are actually up to! This is especially important when it comes to human rights issues such as with the Uyghur people in West China. Overall, this may mean that people start scrutinizing their investments more closely.
“It is no small advantage to live under a hundred swords of Damocles:
That way one learns to dance, one attains “freedom of movement”.”
Friedrich Nietzsche
