Speaking to InvestorDaily, AMP Capital chief economist Shane Oliver said if the dispute escalates into conflict there will be "significant economic disruption".
The natural gas and oil-rich body of water – which stretches from eastern Malaysia to mainland China – is contested by six nations: Brunei, the Philippines, Malaysia, Vietnam, Taiwan and China.
China claims the entire stretch of ocean on the basis of ‘historical’ occupation.
Mr Oliver said the situation is an issue "simply because it involves the strongest part of the global economy: Asia".
Investors should therefore be aware of developments in the South China Sea.
"Investors only start reacting when something hits the headlines," Mr Oliver said, adding that most investors also find it difficult to evaluate geopolitical issues.
Currently, China is unwilling to multilaterally negotiate with other claimants in order to resolve the dispute.
This was recently demonstrated by China's refusal to discuss the issue at the upcoming ASEAN Defense Ministers Meeting Plus (ADMM- Plus) to be held in November.
There have been reports that China is adopting more aggressive policy measures – suggested by the accelerated construction of oil rigs and airstrips on a series of disputed reefs – to substantiate its claims.
“You can potentially foresee a problem but it’s hard to forecast when [the problem might eventuate],” Mr Oliver said.
“That makes life particularly hard for investors because they tend to focus more on what they can see happening.”
Mr Oliver concluded that while the dispute is something of which investors need to be aware, they should remain “alert but not alarmed”.
