Some of the investment trends we talk about are electrifying – like a company that’s a step away from curing a terrible disease, for instance, or one that’s developed a technology that’s set to improve hundreds of millions of lives and boost bottom lines.

Other times, like today, the implications are nowhere near as pleasant or uplifting to consider. In fact, in a world where “war, terrorism, and ugliness” are unstoppable trends, the implications can be, well, ugly and unsettling, to put it mildly.

But it’s important that, as globally oriented investors, we grapple with these issues head-on, or we risk being caught off-balance by them.

Because we do live in a world where vast, multitrillion-dollar economies are intricately connected, and a world where news – good or bad – can circle the planet in two seconds flat.

U.S. financial markets have largely shaken off the mass unrest in Hong Kong, but for reasons we’re going to look at in a moment, that could change in a heartbeat.

And my job as Chief Investment Strategist is to make sure we’re ready when and if that happens…

China Has Been Here Before… in 1989

I can’t help but be shaken by what’s happening in Hong Kong, even though, as I said, U.S. markets have largely shaken it off.

I recall Tiananmen Square in 1989 vividly. And frankly, I fear Beijing may be approaching another Tiananmen Square moment – a “2.0” situation, really.

Westerners believe that Beijing won’t risk the reputational hit that would follow armed intervention, but I beg to differ; nobody thought that in 1989 when protesters took over Tiananmen Square, either.

But as I noted on FOX Business Network this past Wednesday morning, Beijing’s calculus is very different.

It’s so different, in fact, that Beijing may prefer violence over any perception whatsoever of political weakness – or weakening of its all-important territorial integrity.

There’s no doubt in my mind: Chinese President Xi Jingping faces unprecedented challenges if Hong Kong spirals out of control. There’s a risk of a financial hit, given that 60% of China’s outbound trade goes through Hong Kong. And of course, there’s the ongoing trade dispute with the United States and a slowing domestic economy.

Very few people understand what I am about to tell you…

Why China’s Global “Face” Matters

It rarely makes big news in the west, but powerful, popular global brands, like Zara, Marriott, Qantas, Delta Airlines, Calvin Klein, Coach, ASICS, Givenchy, to name a few, have all blundered into implying, be it with a t-shirt slogan or, often, website dropdown menu, that Hong Kong or Macau or Taiwan or Tibet were somehow somehow, contrary to the official government position, “separate from” or somehow less than integral parts of, China.

These companies found out in a hurry that China’s very sensitive to perceptions of its territorial integrity.

All of them have had to perform very real, very elaborate online and media apologies for these faux pas to quell the furious backlash from China’s “netizens” – and, by extension, China’s government.

With the protests and chaos in Hong Kong, the stakes are a lot higher.

China sees the unrest in Hong Kong as a direct challenge to its sovereignty and to the unchallenged territorial integrity it portrays to the world. The prospect of outside influence and loss of face are among the most feared of all “inputs” into the vast political structure that is the Communist Party of China.

Mark my words: China will not hesitate to weaponize nationalism against Hong Kong and the “Hong Kongers” it has identified as driving the protests. There will doubtless be any number of people who disappear in the dead of night when this is over.

Global investors, however, will face a different set of challenges from all this.

How Hong Kong’s Problems Impact the World Market

I think the IPO market, that has until now relied on Hong Kong’s stability and its rule of law, will slow down. Alibaba Group Holding Ltd. (NYSE: BABA), for example, has reportedly delayed a widely anticipated $15 billion Hong Kong Stock Exchange listing as a result of political instability.

Other Chinese companies like Tencent Holdings Ltd. (OTCMKTS: TCEHY) and Xiaomi Corp. (OTCMKTS: XIACF), which are listed on the Hong Kong Stock Exchange, may feel the impact as external financing dries up; some 60% of foreign direct investment flows through Hong Kong.

Hong Kong has enjoyed a de facto position as “a New York backup,” and with $5 trillion in that market, it’s easy to understand why. But for how much longer depends almost entirely on President Xi and whether or not he prioritizes political unity going forward over the economic gains he’s known for – and on which he’s staked much.

In the meantime, keep in mind something we talk about all the time: Chaos always creates opportunity.

What’s happening in Hong Kong is no different, and the stocks that trade there will come under pressure, which will be, of course, a great time to add to ’em.

Mainland Chinese consumers will continue to favor choices like LVMH Moet Hennessy (OTCMKTS: LVMUY) and Japanese cosmetic maker Shiseido Co. Ltd. (OTCMKTS: SSDOY), which trade at around $78 and $80, respectively, as of Friday afternoon.

Or, consider an exchange-traded fund (ETF) like Franklin Templeton’s relatively new Franklin FTSE China ETF (NYSEArca: FLCH). It invests in mid- and large-size Chinese companies that could explode higher with any sort of rebound whatsoever should the situation in Hong Kong be resolved, or should a trade deal be struck in the United States. FLCH is tiny, with assets of “just” $39.58 million according to Franklin Templeton, but it has an admirably low expense ratio of just 0.19% that’s appealing for any speculative money you’ve got sitting around.

— Keith Fitz-Gerald

Source: Money Morning