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Prudential plc (Prudential)’s , released on 9 August 2022, provides interesting insights into another FTSE 350 company that is suffering as a result of the Chinese economy slowdown amid its zero-COVID policy and nascent housing crisis. In the report, the life assurer noted that its Hong Kong division has been hit especially hard by the Asian giant’s attempt to eradicate the virus from its shores. Prior to the coronavirus (COVID-19) pandemic, H1 2019 saw a new business profit of US$694m (£597m) for Prudential’s Chinese Mainland business. However, this has since fallen to close to nil for H1 2022 due to the closure of the Hong Kong-China border, which is still yet to reopen after more than two years.

Despite this, higher sales in Prudential’s 11 other Asia life markets and its Africa business ‘more than offset the lower sales in Hong Kong’ according to the company. New business profits totalled almost US$1.10bn (£950m) for H1 2022—a 6.6% decline on the US$1.18bn (£1bn) for . This slight fall was apparently also due to the closure of the Hong Kong market:

‘The benefit of higher overall APE sales was offset by the impact of higher interest rates under our EEV methodology, particularly in Hong Kong, together with lower sales in Hong Kong, where margins have traditionally been higher and an increase in bancassurance sales mix which tends to have a higher proportion of savings products.’

Prudential has seen a steady decline in its share price over the past year, from 1,466 pence per share on 1 September 2021 to 902 pence per share as of 31 August 2022—a fall of 38.5%. Moreover, its recent publication of a on risk has likely done little to alleviate investor fears, with the company highlighting that ‘a number of risk factors may affect the financial condition, results of operations and/or prospects of Prudential and its wholly and jointly owned businesses, as a whole, and, accordingly, the trading price of Prudential's shares’. These risk factors include market fluctuations, ESG threats, business activities and geopolitics.

Although Prudential holds primary listings in both London and Hong Kong, its business operations focus exclusively on Asia and Africa. This follows an earlier pivot to Asia by the company, with Prudential completing its demerger from UK asset manager on 21 October 2019 and its US business on 13 September 2021. Prudential has continued with its pivot despite the rough trading environment and the increasingly volatile nature of geopolitics, both in Asia and more generally in the international landscape:

‘Inflationary pressures have increased in the first half of 2022. Covid-19 lockdowns in some of the Chinese Mainland’s major commercial and industrial centres have contributed to supply chain risks (although this has moderated to an extent since 2021) and have driven market volatility in the first half of 2022. Geopolitical tensions have become a key driver of economic conditions and policy. The Russia-Ukraine conflict continues to cast a long shadow, with economic and market stresses being particularly intense in Europe given its dependence on Russian energy and commodities.’

The concept of geopolitical risk, as an growing threat to the every-day functioning of business operations worldwide in the aftermath of Russia’s invasion of Ukraine (especially those which operate on an international scale), has become a common theme of discussion in Market Tracker blogs in recent months (for more information, see: Rio Tinto treads carefully amid frosty geopolitical relations, Managing instability—geopolitical risk in an increasingly volatile world, Investors continue to revolt in 2022 AGM season, Ferrexpo’s board takes flak as operations continue amid Ukrainian conflict and FTSE 350 Q1 2022 reshuffle—Ukraine conflict sees board exodus at Evraz and Polymetal as share prices plummet). The threat posed by geopolitical risk has not gone unnoticed by Prudential, which stated in its Half Year Report the following:

‘The diplomatic consequences of the [Ukraine] conflict have driven an adjustment (and some reinforcement) in regional security and trading blocs, with an increasing conflation of economic issues with considerations of national interest and security, and with implications for international strategic competition […] The US-China relationship has been reframed by events in Ukraine during the first half of 2022, and the relationship continues to be a key driver of levels of geopolitical tension, exerting pressure on policymakers in other geographies, including the Asia markets in which the Group operates. […] Legislative or regulatory changes that adversely impact Hong Kong’s economy or its international trading and economic relationships, as a key market which also hosts Group head office functions, could have an adverse impact on sales and distribution and the operations of the Prudential Group.’

Prudential’s decision in recent years to focus almost exclusively on Asian markets and operate from a territory that is at the mercy of the political whims of the Chinese Communist Party (CCP) seems decidedly imprudent in the current geopolitical climate. A quick glance at the recent for semiconductor technology, which is based largely in South Korea and Taiwan, leads one to imagine the possible economic fallout for the life assurer if the Asian giant decides to roll the dice. For instance, if the CCP commits to an invasion of Taiwan to secure the semiconductor technology while the West’s gaze is fixed on Ukraine, or the economic sanctions that could follow if (or more realistically when) the CCP decides to further extend its political and economic tendrils in Hong Kong.

It will be interesting to see if Prudential can wait out the storm until a calmer geopolitical environment appears. Only then will we be able to assess the relative success of the company’s Asian pivot. However, in the meantime, Prudential’s share price is likely to languish at least until the Hong Kong-China border is reopened—a decision that lies in Beijing rather than Prudential’s head office.