Looking into our crystal ball for 2016, we believe that there could be some big changes ahead. President Trump, perhaps President Marine Le Pen in France, a British exit from the European Union, a troubled future for the Euro certainly, a declining property market and slowing growth in the Chinese economy, interest rates rising in the US (but declining in Asia) further deflation with a strong US dollar, and oil bottoming out near $30 a barrel (today it is at $37). Gold, however, might be beginning a new slow ascent towards $2,000 an ounce over the next 5 years, as the aura of invincibility around the central banks begins to dissipate, and faith in fiat “paper money,” including the dollar, starts to decline.
Some forecast a recession in the United States in 2017, which would indicate that the stock market may peak out by the autumn of 2016. Manufacturing and traditional industries are already in recession. Both in the US and in China, the economy is being supported by strong growth in the services and financial sector. The migration of sales from traditional department stores, shopping malls, and outlets to on-line sales has been dramatic and is growing very fast in both hemispheres.
We are approaching the end of the debt super cycle and perhaps the end of the so-called “Kondratieff winter” in 2016-2020. It will be a period of intense volatility in currencies, commodities, and stock markets. Beginning with China, we expect that GNP will keep slowing towards 5% as the “new normal.” There will be more deflationary pressure as a result of over- capacity in almost every sector, and the central bank (PBOC) will continue to cut rates, although the Beijing government will not allow the Renminbi to depreciate as much as the market expects. Consumers and employment will remain resilient. Strong secular themes, such as the internet, health care, and the environment will be a focus for investors. Chinese consumers still have travel as a top priority, as well as upgrading appliances and buying their first car. What has changed is that they are no longer so focused on buying property; and property investment, for the first time in 7 years, is turning negative. We think it is possible, or even probable, that real estate prices will have a significant correction in China by 2017- 2018. Hong Kong high-end real estate may correct by 50%. This deflationary trend will spread from China to other major centers, such as Sydney, Vancouver, New York, and London, where Chinese property investors have been active in the past few years. Meanwhile, the falling oil price has led India’s current account deficit to fall from 4.8% to 1.3% of GNP.
Our Bamboo portfolio continue to focus on Chinese internet stocks, travel, and consumer themes. In India, we expect that the economy will remain robust as oil and other imported product prices weaken sharply and consumption grows. While most areas in the world, including Europe, Africa, and the Americas, will feel the contraction of trade with China, this is not so true of the Indian Ocean region, which will still be growing at a healthy rate. Once again, our theme in India is services rather than manufacturing, travel and tourism, and consumer sectors, rather than oil, minerals, and property. We see a positive, democratic transition in the Philippines in March 2016 and we are looking for value there. We remain bearish on energy exporters such as Indonesia and Malaysia although we are constantly on the lookout for exceptions to rules.
What is fascinating in the world today is the geopolitical changes which are coming from the dramatic fall in the oil price and other key commodities, like iron ore. In Argentina, we have seen the Peronists thrown out in favour a pro-market movement under Macri. In Venezuela, the socialists have also been defeated. The Brazilian president is under the process of impeachment. Russia will see a GDP fall of 4% or 5%, because of oil. The same pressures are coming to bear on Iran, Iraq, and Saudi Arabia. We may, perhaps, hope that over the next decade, the shrinking of the traditional oil power symbolized by OPEC, will also cut off some of the funding for the evil fanatics of ISIS and the Jihadis.
In the meantime, however, there is a serious problem in Europe, with the arrival of so many refugees and immigrants and the difficulty for the security services of keeping up their guard against internal security threats. That is why we highlight the relative political and economic stability of Asia in the next 2 or 3 years. The terms of trade have dramatically improved for Asian consumers and countries, including Japan, Korea, China, and India. Although the yen may continue to be weak, Japanese companies are reporting record profits, and share prices are still reasonable. We are finding many good opportunities in high quality Japanese companies with “a margin of safety” for investors.
Finally, as we look forward, we must also consider the impact of technology. The Climate Change Conference in Paris has focused attention on the global desire to reduce carbon emissions and burn cleaner fuel. Apart from wind and solar, perhaps the obvious beneficiaries are natural gas and nuclear. We also see many investment opportunities in the area of clean water, which is a pressing need for all the emerging countries. The electric car has become an important theme, both in China and the US, epitomized by Tesla and such companies as BYD in China. We believe the best investment opportunities may be in the manufacturers of batteries, of which there are 2 outstanding suppliers in Korea and one in Japan. It is worthwhile, again looking into the future, of trying to discern who are the winners and who may be the losers of this technological tipping point, including oil and gas producers and large automobile groups in the US, Japan, and Europe. And, of course, a theme we have reverted to several times in the past year is the deflationary impact of the internet on prices in every sector from travel to retail to property. There is a beneficial effect of this deflation in the advance of creative inventions and discovery. And, as investment managers, we must be ahead of the curve.
Robert Lloyd George
11 December, 2015
Wishing all our readers a very Happy Christmas and Prosperous New Year!