The US and China's relationship is already historically bad, but it could get worse. Here's how Societe Generale says investors can protect themselves from worsening tensions.

• Tensions between the US and China may have ramped up to historically high levels in recent months, but so far the impact on stocks, particularly in China, has been muted.
• That could change, however, and investors should be ready if it does, analysts from Societe Generale wrote Monday.
• A number of scenarios related to worsening tensions could hit markets, a team of analysts lead by Frank Benzimra, the bank's head of Asia equity strategy, said.
• Those "arenas of economic tension" include the US pulling out of the Phase One trade deal, an extension on sanctions against Chinese tech firms by Washington, and a crackdown on companies providing the Chinese military with equipment.
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Tensions between the US and China may have ramped up to historically high levels in recent months, but so far the impact on stocks, particularly in China, has been muted.

That could all change, however, warned French banking giant Societe Generale on Monday, with analysts at the lender advising clients to start hedging against a series of risks to the markets linked to Washington and Beijing's deteriorating relationship.

"The market reaction has been muted so far. Year-to-date the CSI 300 is the top-performing large market, standing close to its post-COVID-19 high of mid-July," analysts led by Frank Benzimra wrote Monday, noting that China's Shanghai Composite index is up more than 11% since the start of the year.

Writing in a note titled "Ideas for hedging equity against escalating US-China tensions," Benzimra, the bank's head of Asia equity strategy, set out a series of potential scenarios that could push stocks lower, and how to offset those falls.

"Our objective in this piece is to identify the downside risks of further deterioration in relations following the third (and final?) US Department of Commerce decision on Huawei and to propose some equity hedges in case those risks materialize," the note said.

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SocGen said investors are ignoring four "arenas of economic tension" and simply not pricing them and their potential economic impact into their portfolios.

Below are the four scenarios laid out by the bank and its team of analysts, and how investors can protect themselves should the risks described materialize:

Scenario one: An end to the Phase One deal.

Hedge: SocGen recommends to investors to take a short position on a basket of stocks listed in Hong Kong, Taiwan, South Korea in case the US decides to abandon the Phase One deal.

Scenario two: An extension of technology restrictions on Chinese companies.

Hedge: The bank recommends investors short technology stocks including Tencent and Alibaba in the event that restrictions on WeChat are extended to a range of other Chinese tech firms.

Scenario three: Fresh sanctions against financial institutions in Hong Kong and China.

Hedge: Investors should hedge against falls in stocks affiliated to Hong Kong or China banks in the event of "sanctions on financial institutions linked to sanctioned HK officials or those transacting with embargoed firms."

Scenario four: Potential US crackdown on companies providing goods to the Chinese military.

Hedge: The bank said investors should short any stocks that the US Defense Department identify as connected to the Chinese military in the event regulators exclude these stocks from US markets and trading platforms.

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Tensions between US and China initially flared in 2017 over trade, but have escalated in recent months. That is largely thanks to a deepening blame game over the coronavirus pandemic, and draconian new measures imposed by Beijing on the semi-autonomous region of Hong Kong.

US President Donald Trump said last week that he personally cancelled US trade talks with China. Both countries were due to review their Phase One trade deal earlier this month but this was postponed.