Ian Cowie: will history repeat itself and lead to US/China cold war?

As events unfold in Afghanistan, our columnist has concerns about escalating tensions between the world's two superpowers.

Many investors will think their portfolios are unlikely to be impacted by the events unfolding in Afghanistan. However, both current events and history strongly suggest complacency around your investments could prove wrong - especially for investment trust shareholders.

The chaotic retreat from Kabul has reminded many of the fall of Saigon, when helicopters rescued the rump of American armed forces after defeat in the Vietnam War. Fewer commentators have recalled what led to that debacle in April 1975, and how Western weakness emboldened Eastern rivals in a way that could provide cataclysmic parallels with today.

Two years earlier in January 1973, America and Vietnam signed the Paris Peace Accords intending to end the fighting and preserve the independence of South Vietnam. This was guaranteed by a promise from the American president at that time, Richard Nixon, that the USA would “respond with full force” if North Vietnam violated the treaties.

Then the Watergate scandal forced Nixon’s resignation and the North Vietnamese realised the Americans were reluctant to fight another foreign war. So they attacked again and swept on to total victory.

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Here and now, while occidental observers may have forgotten the past, their oriental opposition has not. China’s state-controlled media is warning that Afghanistan and Vietnam should remind the people of Taiwan not to rely on American protection in their long-running dispute with China.

Hu Xijin, editor-in-chief of the state-controlled Global Times, said: “After the fall of the Kabul regime, the Taiwan authorities must be trembling. The power transition in Afghanistan is even more smooth than a presidential transition in the US.

“The failure of the US in Afghanistan should serve as a warning to the secessionists in the island, who have to understand that they cannot count on Washington, as Afghanistan is not the first place where the US abandoned its allies, nor will it be the last.”

Similarly, one of the few American politicians to predict disaster in Afghanistan before it happened, Mitch McConnell, leader of the Republicans in the Senate, said last week: “President Joe Biden’s decisions have us hurtling toward an even worse sequel to the humiliating fall of Saigon in 1975. President Biden is finding that the quickest way to end a war is to lose it.”

Coming down from the clouds of macro politics and how the cold war between America and China is heating up, many British investors might be surprised at how much money we have at risk. For example, the only Association of Investment Companies (AIC) member large enough to qualify for the FTSE 100 Index of Britain’s biggest shares, Scottish Mortgage (LSE: SMT), ranks the Chinese giant Tencent (SEHK:700) as its largest holding with China mega-caps, Alibaba (NYSE:BABA) and Meituan (SEHK:3690), not far behind.

SMT’s total exposure to China is 18% of this £20.5 billion fund and many popular investment trusts have much bigger percentage exposures. For example, JPMorgan Asia Growth & Income (LSE: JAGI) has more than 38% of shareholders’ money in China, with another 16% in Taiwan and nearly 9% in Hong Kong; that’s nearly two-thirds of its £443 million total assets. Similarly, Invesco Asia (LSE: IAT) has 30% of its assets in China and 16% in Taiwan.

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But some Asia funds have much less exposure to China. For example, Aberdeen Standard Asia Focus (LSE: AAS) has only 2.4% of its assets in that country, while Aberdeen Asian Income (LSE: AAIF) holds just over 10% there; and Schroder Oriental (LSE: SOI) has 11% direct exposure. However, their holdings in Taiwan are 14%, 21% and 23% respectively.

Against all that, one of the best long-term analyses of the stock market is called ‘The Triumph of the Optimists’ and this columnist prefers to avoid predictions of doom that are so ubiquitous elsewhere. It is also noteworthy that Invesco Asia's asset allocation has done shareholders absolutely no harm to date, with its Asia Pacific Equity Income sector-topping total returns over the last year of 27%, while JPMorgan Asian Growth & Income leads the field over five years with an eye-stretching 107%.

However, questions remain about how many investors realise what risks are being taken to earn these rewards - and whether those who have forgotten the past in Asia are bound to repeat it.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.