From the moment a Russian tank drove across the Ukrainian border, the investment world changed. This is a war between two countries that mainly export commodities.

Russia is the world’s largest oil exporter – at the beginning of the year, it produced 11.3 million barrels a day. International Energy Agency. It is also the world’s largest exporter of wheat. Ukraine is another major food producer.It exported 48 million tonnes of corn and wheat last year, according to S&P Global estimate. Both countries share the same largest agricultural market – China.

With almost closed trade with Russia and Ukraine, commodity price rising globally. That often exacerbates political risk in emerging markets when fuel and food prices rise, commodities that make up many households’ daily budgets.

Wheat prices experienced a similar rise 2010, when droughts hit Russia and Ukraine and other food-producing countries experienced severe weather-related problems. The Arab Spring followed. Rising food prices aren’t the only reason, but they help push political tensions into an uprising.

For global equity managers, emerging markets can provide excellent growth drivers when conditions are good. However, the history of investing in emerging markets has been marked by occasional crises. Behind many of these is often a political story that begins beyond the borders of the affected country.

So, for example, Russia currently runs the risk of not paying its interest. government debt. The last time this happened was under Boris Yeltsin in 1998 (the last time was post-revolution in 1917). 1998 was a dismal year in the memory of emerging market investors, as many Asian stock markets crashed. The collapse may be blamed more on Brazil and Mexico’s defaults in previous years than Russia’s, but nonetheless, Russia’s default will evoke memories.

Russia remains a small part of emerging market investment. At the beginning of the year, China accounted for about 4% of the index, compared with 32% in mainland China, 16% in Taiwan, 12% in India, 12% in South Korea, just 5% in Brazil and 22% in other countries. As such, China determines the exposure that investors may choose in emerging markets today – especially if you are a passive investor.

Even before the war in Ukraine, China was causing difficulties for international investors.less than a year ago I wrote an explanation Why my team decided to sell all of our fund’s investments in China. We have been monitoring how regulations are starting to change in ways that could hinder shareholder value creation. We also noticed that the shareholders of major tech companies such as Alibaba and Tencent are not Chinese, as these stocks are listed outside the mainland and local investors can only invest locally. We worry that this will lead to censorship in Beijing.

In November 2020, the public offering Ant Financial on Alibaba’s fintech side was cancelled at the last minute. This is expected to exceed $35 billion, so there are red flags.

Over the next few months, a wide range of regulations and some fines were announced, hitting the value of other Chinese stocks, from food delivery to education to gaming companies.

Each announcement makes sense to take care of the Chinese, but many overseas investors infer that growth prospects for China’s most popular listed stocks have been downgraded significantly. The target company’s stock price plummeted.

We would not be brave enough to predict that this regulatory shift is over. Arguably, demographic factors put pressure on Beijing to act further.

When I first started investing in China in 2002, there was an economic case for creating manufacturing jobs along the coast, allowing people to leave the land for these more productive jobs. Foreign investment makes this possible and encouraged.

Twenty years later, the one-child policy has left China with fewer young people able to fill jobs, Aging population. China doesn’t need foreign capital; it needs money to pay for social security. That could mean higher taxes, and profitable companies are most likely to be called up.

So, how does Russia’s invasion of Ukraine affect China? It is on Russia’s side, but must so far avoid being dragged into conflict. There is no doubt that Beijing has observed the effectiveness of Western sanctions against Moscow and pointed to how much such sanctions can affect their own economy.

Look again at the trade data, which underscore the importance of China in the global economy.According to statistics, it exported 2.7 tons worth of goods in 2020 World Bank, is the world’s largest manufacturer of mobile phones, computers, office machinery and clothing. The United States is its largest market. Neither country wants to stop trade suddenly.

Overall, how risky is investing in China for investors? A good test is to ask yourself: “If you bought stock and found out that your shareholder rights were abused, would you expect your local court to uphold your rights?” You might also ask: “Under pressure, the stock exchange What are the chances of a shutdown or a significant devaluation of the local currency?”

Very cautious investors will note that Russia shut down stock exchanges at the start of the war, effectively making Western stock investments worthless. Some may recall that many stocks in the Shanghai index were suspended for several weeks in 2018. The market fell sharply during the trade dispute with the Trump administration in the United States. Beijing now appears to be working hard to avoid a repeat of such disputes. This is encouraging.

In fact, some investors may be attracted by the extremely low valuations of Chinese companies. According to Bloomberg data, Shanghai stocks trade at 15 times earnings this year and Hong Kong stocks at 8 times. US stocks trade 23 times on the same basis. Over the next 20 years, China’s economy is likely to grow faster than that of the United States, and there may be less inflation risk. So, to some, current Chinese valuations offer an attractive “entry point”; and that’s probably true.

I can leave China.Other markets in the region can give me exposure to the higher growth rates expected in Asia while allowing me to spread my holdings across different political environments

As a global equity manager, I have a wider range of options than a manager focused on a specific region or industry. Although it is an important economy, I can jump out of China. Other markets in the region give me exposure to the higher growth rates expected in Asia, while allowing me to spread my holdings across different political environments. South Korea’s Kospi trades at 1??2 times earnings and Taiwan’s at 1??4 times earnings.

A few years ago, the fund I managed had 10% of its assets in China.Today we have similar numbers in Korea and Taiwan, including Samsung and TSMCwhich are the largest stocks in each index.

We have also expanded our exposure to emerging markets through our holdings in developed countries. for example, Singtel, which has a controlling stake in the largest mobile phone operator in Indonesia and Malaysia. It’s a good illustration of what we particularly like about businesses – resilient companies operating in what we consider a “cockroach” industry to be safe.

Investors cannot avoid risk, but there are often ways to help mitigate it.

Simon Edelsten is Co-Manager of Mid Wynd International Investment Trust and Artemis Global Select Fund