The first week of December has seen a spike in volatility, after the Huawei news, nervousness about Brexit, and uncertainty on Fed actions. Headline news can be misleading – the true story is one of progress and reconciliation between the US and China, (and possibly between the UK and the EU, if a second referendum is called). We remain positive on the Asian markets in 2019.
November saw a notable recovery in Asian markets, especially in India where we achieved an 8.5% gain (in US Dollars), and in our Bamboo Fund up 5.5% or twice the Asia Pacific benchmark. Much of this recovery has been due to a fall in the US dollar, and recovery of Asian currencies, and also the news coming last weekend of a ‘truce’ between President Trump and President Xi Jinping in the ‘Trade War’. With the oil price also strengthening somewhat after the G-20 meeting, this will result in a much better tone in Emerging Markets in the next few months. We expect that this rally will last well through Christmas and Chinese New Year and hope to see some resolution of the trade issue before the end of the three month period on February 28, 2019.
The reaction in China has certainly been positive and one consequence is that the government is easing its tight austerity measures, including deleveraging, in favor of a more stimulative program, as well as opening up the Chinese markets for imports by lowering tariffs on automobiles and other sectors, including the important financial sector where American banks and fund management companies can now have wholly owned subsidiaries. In November, growth in the services sector grew at its fastest pace in 5 months, and the PMI rose to 53.8, which confirms a policy shift. We believe the impact will be favourable for the A-Share market, that the Renminbi will be held stable, (or not break the RMB7.00/US dollar line) and that business confidence, which has been quite depressed in China this year, will recover in the next few months.
Another major impact will be the acceleration of the trend of transfer of manufacturing to Vietnam, Indonesia, Thailand, Malaysia and the Indian sub-continent. We see already more Chinese and multinational companies moving production to these areas not only because of US pressure but also because of lower costs.
Our portfolio strategy is gradually to move the ASEAN weighting up towards a third of the portfolio.
I spent two weeks last month in Australia, a wonderful, welcoming country with abundant natural resources and beauty (especially in the Northwest, around Broome). With a GDP of US$1.4 trillion, and an average income of A$73,500 (US$53,057), Australia is a wealthy country with only 24 million people, which has not had a recession for 27 years. One of Australia’s most remarkable achievements has been building up US$2.7 trillion of “Superannuation” or retirement funds, which is equal to almost twice GDP, or over US$100,000, each. (As Alan Greenspan’s new book, Capitalism in America, highlights, the greatest US challenge of the next few years is tackling the entitlement problem and the US$22 trillion national debt.)
China is now easily Australia’s largest trading partner, accounting for about 32% of exports (almost half of which is iron ore) and 25% of imports. We are working on the assumption that China’s economy may slow to 6%, but its infrastructure demand (including One Belt One Road) will maintain growth and momentum, supporting commodity prices. (Interestingly, the fastest growth in Australia’s exports of 33% has been to India.) Also, Australia has recently become the No. 1 world producer of lithium.
In addition, there are now over 200,000 Chinese students in Australia, and 1.3 million Chinese tourists spending over US$10 billion annually. (They also buy 25% of Australia’s excellent wines.) The property market in Sydney, and other major cities, has been supported by Chinese purchases, but house prices are now expected to correct, with median prices at 7 times average disposable incomes. Our investment focus in Australia has been mainly on resources (including gold mining), but also on the healthcare and services sector, also closely connected to China.
Thinking about China’s path over the next 3 years, it is worth keeping the long term perspective in mind. Since 1978, or 40 years since Deng Xiao Ping’s economic reforms began – life expectancy has been extended by 9 years, and average annual income has increased from 614 Yuan to 67,569 Yuan or about US$10,000, a nominal increase of 100 times, while the US average has grown 5 times. The proportion of the Chinese population living in cities has grown from 18% to nearly 60%, or 840 million.
The Communist party’s legitimacy since 1989 has rested on its ability to deliver economic growth and better living standards, not Marxist ideology. The question today is whether this can be maintained, under increased pressure from the USA and under a lifetime presidency with no constitutional procedures for the succession.
On balance, we give the benefit of the doubt to Chinese economic planners, who have managed successfully a transition from a state directed economy to one today whose growth is driven nearly 80% by consumer spending. Our investment strategy remains focused on healthcare, education, travel and tourism, and e-commerce.
Robert Lloyd George
7 December 2018