“Divergent Realities and the Hong Kong Situation”

There are two topics this month.  One is the divergent directions of the US and world economy and of the US and global stock markets, and the second is the situation of Hong Kong.  Last week, the Chinese National People’s Congress passed a new security law covering Hong Kong, which covers treason, secession, subversion, and terrorism.  I believe that there is a legitimate cause for concern in the circumscription of freedoms:  free expression, free press, the right of peaceful protest in Hong Kong; but there is no excuse for violence, and the effect of last year’s demonstrations has now come home to roost with China taking a much more active, and direct, rule in the territory.  The “one country, two systems” concept is finished in 2020, rather than in 2047, and China’s military and intelligence people will now be present in Hong Kong.  Many of the 85,000 Americans, who live in Hong Kong, may be questioning their future, and some companies will, undoubtedly, move to Singapore. 

But these fears should not be exaggerated.  Hong Kong will always have an important function and purpose for China as a conduit for foreign capital, and also for Chinese capital going overseas.  Now many of the Chinese companies listed in New York, including Alibaba, and many other large technology groups will move their listings to Hong Kong, adding an estimated $1 trillion to the market capitalization and supporting the Hong Kong Exchange.  Chinese money has been flowing into Hong Kong shares already, and the surprising thing is that the market is at exactly the same level, if not higher, as it was before the NPC decision. 

What comes next may be a vote by the US Congress to remove the special status enjoyed by Hong Kong under the US/Hong Kong Policy Act of 1992.  It is possible that sanctions might be imposed which would impact Hong Kong’s role as an international finance center.  As the Secretary of State said, “No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China.”  But Hong Kong’s role, as one of China’s leading cities, will still be important and, although property has been weak during the Covid 19 crisis, we do not expect a collapse, considering that neighboring Shenzhen and Guangdong property is almost as pricey.  The Hong Kong Dollar Peg with the US Dollar will not change and, despite heavy media coverage, we expect that leading companies such as HSBC, China Light and Power and many of the leading Hong Kong property developers, will find a way of maintaining and growing their business in the future.  We are, ourselves, moving to a new office near Hollywood Road in July. 

So, why, when the US economy has had its steepest fall since the Great Depression, and unemployment has reached 14.7% or 40 million people out of work, has the stock market rebounded by over 30% since its low on March 23rd?  One explanation is the explosion of liquidity, engineered by the Federal Reserve, which amounts to almost $5 trillion, or about 25% of GDP, in the course of less than 2 months.  Also, investors look not only at the short-term (and there is no question that 2Q earnings, to be released in July, will show a collapse) but also look forward several years, to see the future stream of earnings and dividends in order to value shares.  On this basis, the market is not, yet, as overvalued as it was in 2000, or even in 2008.  We expect interest rates to stay low, although the price of oil, gold and silver will continue to strengthen as economic activity picks up, and inflation may reappear in 2021. 

The extraordinary thing about stock markets is how they anticipate and, in some mysterious way, understand the future trend, before it is apparent in the economic or political headlines.  In his wonderful book, War, Wealth, and Wisdom, Barton Biggs points out that the London Stock Exchange bottomed out in June 1940, shortly after the evacuation of Dunkirk, but before the Battle of Britain, when it was by no means clear that Hitler’s planned invasion of the island could not succeed.  The New York Stock Exchange marked its bottom at the Battle of Midway in May 1942, which also marked the extreme expansion of Japan’s conquests in the Pacific.  And finally, the Berlin Stock Market peaked on the day that Hitler invaded Russia in June 1941.  So it is not so extraordinary that the S&P500 bottomed on March 23rd, which was actually at the moment at which the Coronavirus was at its fiercest, with nearly 1 million infected and now 100,000 fatalities in the US, the lockdown just beginning and unemployment rising to new highs.  What did the stock market see?  Looking ahead, it was anticipating a V-shaped recovery, possibly a vaccine, and a relatively short-term effect of the virus.  On the economy and corporate earnings, the key point was the support of the Federal Reserve for the economy. 

In Asia, the lockdown has not been quite so severe as Europe and the USA.  Nevertheless China, and recently, South Korea, have seen a 24% fall in exports.  One of the major reasons why we still see opportunities for investing in Chinese companies, is that China is becoming an increasingly domestic-oriented economy.  Chinese consumers will buy Chinese brands, they will take their holidays in China and there will, at least this year, be a continuing caution about public events, conferences, sports events, in the face of the Covid 19 risk continuing, and a second wave occurring in East Asian countries.  This pullback by China will have a chilling effect on some of the economies, such as Thailand, Malaysia, and Singapore, which have depended on Chinese tourism and investment.  Tourism, as an industry, accounts for 10% of world GDP; and it is hard to see airlines and hotels demonstrating a rapid recovery.  Nevertheless, we maintain our long-term constructive approach to the opportunities in India and Southeast Asia.  These low income, large, and young populations, have the ability to take up much of the manufacturing, which will now move out of China.  Indonesia, and other ASEAN countries, are undertaking large infrastructure projects, as is India.  There is also a degree of currency and political stability in the region, which is important for investors.  We have recently looked at “Dividend Aristocrats” in Korea, Taiwan, and Southeast Asia, with the emphasis on a high-dividend cover and good dividend growth.  In many cases, such as Singapore, we can find excellent companies, with 5% dividend yields, in a hard currency, such as the Singapore dollar.  Here, again, we emphasize sectors, such as healthcare, e-commerce, telecommunications (5G), and infrastructure.   We eschew any exposure to airlines, hotels, and consumer luxury goods.

Most Valuable Chinese Companies Listed On U.S. Exchanges

Company Ticker Primary U.S. listing (P) or Secondary (S) Market Capitalization ($ Billions) Sector YTD Stock % Ch.
Alibaba Group (BABA) P $535.9 Consumer Discretionary -4.9%
PetroChina (PTR) S $106.0 Energy -32.0%
China Life Insurance (LFC) S $88.5 Financials -33.3%
Pinduoduo (PDD) P $82.3 Consumer Discretionary 71.6%
JD.com (JD) P $73.0 Consumer Discretionary 49.3%
China Petroleum & Chemical (SNP) S $68.0 Energy -24.9%
NetEase (NTES) P $48.0 Communication Services 26.0%
Baidu (BIDU) P $35.6 Communication Services -14.2%
TAL Education (TAL) P $31.5 Consumer Discretionary 18.9%
ZTO Express (ZTO) P $24.1 Industrials 37.7%

Source: IBD, S&P Global Market Intelligence

It is also true to say that much of the capital flowing into the market (mainly institutional and hedge funds, rather than retail) has focused on the giants of e-commerce and software, such as Amazon, Microsoft, Facebook, and Google.  The smaller manufacturing names of the Russell 2000 have been left behind, and this does reflect economic reality.

Will Asia, and Emerging Markets, start to outperform at last, compared to the S&P500?  We believe that this is a probable trend, beginning with a weakening of the US dollar, and a gradual rise in consumer prices.  It is, of course, true that China still has an outsized influence on commodity prices, and on many developing nations whose largest trading partner it is.

Hong Kong

4 June 2020

© Lloyd George Management (HK) Limited

“Life After Covid 19”

Finally, Western economies are beginning to reopen and by mid/end May, we expect to be (almost) back to normal. It is not yet clear what the new “normal” will be. We can, however, begin to draw some tentative conclusions as to how life will be when the lockdown ends. China, and some European countries, are now beginning to open up their economies again, but consumers are wary and cautious about spending, except for essential supplies, and cautious about travel, and being in public places. Masks will become as ubiquitous in Europe and the USA as they are in Asia.

So our first conclusion is that economies will continue to be fragile, and there will be caution, both in stock markets, which are currently diverging on the upside from the real economy, and in consumer spending. The reason markets are so strong is probably the extraordinary government support that has been rolled out, both in the US and Europe, to bolster incomes and employment.

The “Virtual World,” which we wrote about last month, is more than ever a key theme for us as investors; and we are looking for long-term opportunities in:
(1) E-commerce (Amazon, Alibaba, etc.).
(2) On-line learning (TAL, New Oriental)
(3) Tele-medicine (Teladoc, Ping An Good Doctor)
(4) Video games (Tencent, Activision Blizzard, Bilibili, Netease)
(5) Communications (Zoom, Netflix, Disney, even Verizon).

Consumer habits may well have changed permanently as the ease of on-line ordering and communications has greatly improved. The focus of buyers is on essential supplies, i.e., toilet paper, hand sanitizer, Clorox bleach, food, and medicine supplies, not on luxury goods or new clothing. This is the first impression of our observers in China, as China reopens.

Secondly, World Trade will suffer. Exports and imports have been badly damaged in China and other Asian exporters, as well as Europe and the Americas. Both shipping and aviation have been shut down for 6 weeks now, and will take some time to recover. There is a growing backlash in western countries at their dependence on China, especially for pharmaceutical supplies such as antibiotics and Ibuprofen, (a nonsteroidal anti-inflammatory), as well as masks, gowns, gloves, and other key medical products.

US-China relations will be negatively affected. There is no question that there is some anger at China about how they have handled the virus, their reporting of cases and, indeed, the actual origin of the Covid 19 in Wuhan. China has unsuccessfully tried to counter this negative commentary by putting out its own propaganda; but expelling US journalists will not help their case, nor the recent arrests of leading democracy activists in Hong Kong on April 18th. The global economy is likely to go into a period of low growth for up to 12 months, and the very negative price action of oil, industrial metals, and some food prices is indicating this clearly. The only commodities which have shown positive trends are orange juice (for vitamin C), coffee, and gold. With the introduction of Modern Monetary Theory, we continue to believe that gold and silver will steadily appreciate and reach new high prices.

Our reports from Asia are fairly negative. China’s GDP in the 1st quarter 2020, shrank 6.8% -the worst figure since 1976. The Chinese Communist Party has tried to maintain at least 6% positive growth for many years now to enable employment for the growing young population to be provided. This could cause social unrest. Exports fell 17% in January and February, and 6.6% in March, but are likely to continue to decline as US, Europe, and SE Asia have been locked down for a month. Domestic retail sales fell 16.2% in March. China is likely to come out with a stimulus package in the next few weeks. On the positive side, healthcare, on-line services, mobile gaming, data centers, and PCs have done well. Total mobile internet time spent rose 24%; entertainment time, 31%; mobile game time grew 65%; and Tencent’s mobile games market share grew to 83%. We have a number of names ready to buy in China, including GDS in the cloud space; Silergy (Taiwan technology); and in the medical field, AK Medical and Innovent Biologics.

Hong Kong has seen a further contraction in its property market, with rents falling 15% from their peak last summer. Retail sales were down 44% in February, visitor arrivals were down 96%, and luxury sales were down almost 80%. More than 1,000 restaurants in Hong Kong have closed down, and hotel occupancy is at 22%. The government is offering some small relief, but nothing like in the West. Unemployment has risen to 6.1% from 3% a year ago; and Hong Kong is experiencing a second wave of cases, as foreigners and locals returning from Europe have infected others.

India introduced a complete lockdown across that vast nation of 1.4 billion on March 24th, when there were only 520 confirmed cases. This has, generally, prevented a more rapid spread; although, as of April 29th, the number of cases was only 30,000. It is, after all, a tropical country with a young population. In general, rural India has been spared the virus. The lockdown period has been extended to the 3rd of May, and the economy is probably going to contract by 2% in the 2nd quarter; but it is expected to recover later this year with 1.9% growth in 2020 and 4.7% in 2021. India is relatively insulated from global supply chains, with exports to GDP under 10%, so the health of the domestic economy will be the key. It is, as elsewhere, very difficult to forecast corporate earnings, which may be marginally positive; but foreign investors have sold US$6.6 billion worth of Indian shares year-to-date, and the Indian Rupee has fallen 6.5% against the US dollar, in line with other Asian currencies. However, the fall in the oil price is a boon for India, which imports 85% of its requirements, and the Indian market is now on its lowest price earnings, and price to book, since 2009. We remain positive about the Indian market. On SE Asia, we are somewhat more cautious, as the lockdown in Singapore remains very strict (and there has been a “second wave” of over 10,000 cases), and Indonesia and Philippines, with their large urban populations, are prone to a rapid spread of infection. One nation that has been relatively spared is Vietnam, but their dependence on exports and the illiquidity of the share market, will weigh on performance.

We are living in an extremely interconnected world and the leading edge of Asian economies such as Japan, Taiwan, Korea, and China, is bound to affect what happens in Europe and the USA. There is some good news in Taiwan and South Korea which, like Israel, were also on permanent defense alert, and therefore reacted quickly to the threat of the virus. But the big open economies like the United States have been terribly defenseless and easily infected and it is difficult for free western democracies to lock down all their citizens, as the Chinese did. We can only hope that medical breakthroughs (antivirals and vaccines) will provide some confidence and a positive way out of this pandemic within the next 9-12 months. Oxford University is today reported to have a vaccine ready and being tested, possibly available in the autumn.

At the time of writing, both European nations and US states (especially in the South and Midwest) are gradually reopening. The stock market scents this opportunity; and after 3 months of economic depression, the recovery may be “U” not “V” shaped, but it is coming.

Hong Kong
May 1st, 2020

A Virtual World … and Helicopter Money

Over 100 years ago (in 1909), EM Forster wrote a visionary and prophetic science fiction short story called “The Machine Stops,” which describes a future world where humanity lives underground and relies on a giant machine (like the Internet) for all communications and daily needs, etc.  Each person lives in a room with a large screen, and the protagonist talks daily by this means to his mother in Australia, who eventually is persuaded to visit him by making a rare transcontinental journey.

The sudden global advent of the Coronavirus, COVID19, has accelerated the trend towards virtual work, study, and leisure.  Children are staying home from school for up to 2 months, and doing ‘online’ classroom sessions.  Office workers may permanently abandon their offices after 100 years of commuting, traffic jams, etc.  (SARS in 2003 was the spur that accelerated the advent of online businesses like Alibaba and Tencent in China.)

The virtual world has arrived.  The companies that benefit are, of course, the giant technology companies, such as Amazon and Alibaba, which guarantee home delivery of groceries, gifts, toilet paper, hand sanitizer, Clorox, and everything else.  Even the videogame companies (Tencent) are seeing revenues climb, both in China and the West, as teenagers and others spend hours in their bedrooms playing “Minecraft” and so on.

There will clearly be great environmental benefits.  The angst and rage of the climate change lobby will surely be assuaged as we stop taking planes, cars, and trains.  The world will be a cleaner, quieter place; and economic growth will first dive into recession, then level off at a lower level.  Markets have already anticipated this trend, with a 30% correction in 4 weeks (to mid-March) with a speed unprecedented since 1929 (that, too, resulted in fundamental changes in society and the economy).  In fact, data for February in China show a 25.9% fall in industrial output and 20.5% fall in retail sales, while fixed asset investment fell 24.5%.

It is very likely that the oil price stays depressed for some time if aviation, and shipping, and transportation are in a permanent downshift.  The outlook for other commodities remains uncertain, with China demand being a major factor.  Although gold — we anticipate – will continue to climb steadily as QE, or even MMT (Modern Monetary Theory) becomes the new policy of central banks desperate to reflate, but with no interest rate weapons left. Even the USA has now reached zero; will it go below?

For Asia, it is a watershed.  However, the strong financial position and ample reserves in China, S. Korea, Japan, Taiwan, Hong Kong, and Singapore will surely help them weather the storm, along with the proven rigour of virus testing and social controls, which has, for instance, resulted in Taiwan and Singapore having very few fatalities (and lower case counts).

So we anticipate that the economic recovery will start first in Asia, probably in the 2nd quarter; whereas, it will be summer before Europe and America begin to rebound from a steep economic recession.  We are now looking for buying opportunities both in China and in India and Southeast Asia.  Our focus will continue to be on e-commerce and healthcare rather than trade, tourism, or transportation. 

Which other companies (especially in China) will benefit from this important new trend?  In the US, it has been biotech and pharma (those researching for a cure or vaccine, such as Moderna and Gilead). 

Also companies making face masks, hand sanitizer, etc. Some grocery chains, which provide essential daily supplies (Whole Foods, now 100% owned by Amazon).  Campbell Soup, Clorox, Johnson and Johnson, utilities, and other basic supplies.  Avoid airlines, hotels, restaurant chains, and office renters and developers.

Helicopter Money:

The decision by the Trump Administration to send $1,200 cash to every US citizen (with income less than $99,000), and $500 for every child, marks finally the arrival of “newly created money dropped from helicopters,” described by Milton Friedman years ago.  (The UK is espousing a similar policy.)  It will clearly alleviate the pain of those working in travel, food, leisure, sport, and retail – and is a compassionate policy for hard times.  But it is also a radical economic idea (is this “tax payer’s money”?)  It looks like a Universal Basic Income, as advocated by progressive socialists, but introduced by (Republican) Donald Trump and (Conservative) Boris Johnson.

It will boost demand, and, perhaps, inflation.  It will depreciate the value of savings. Instead of receiving an income from your labour, or from your capital (in the form of interest and dividends), you will receive an income merely for being alive.  It is the ultimate welfare “Big Brother” state.

Investors in this environment, and with zero interest rates, should definitely own gold, which we expect to exceed its old high of $1,800/ounce.  Inflation-linked bonds might also do well.


At the lowest point in March, the S&P was down 30% from its high on February 19th, the most rapid decline since October 1929.  Apart from a few stocks like Zoom (+130%), Netflix, and Gilead Sciences, all stocks are down (especially cruise lines).  By contrast, the Shanghai market is only down 12%, and Asia ex-Japan, about 18% this year.

By March 30th, there were nearly 800,000 cases of the virus worldwide, and over 35,000 dead: Europe’s infections are now peaking, whereas the US numbers are just beginning to rise.  Also, over 3 million Americans applied for unemployment last week, and some expect 20% to 30% unemployment (worst since 1932).  There are dire forecasts of 500,000 deaths in the UK and 2 million in the USA, if no “mitigation” or social distancing, or stay-at-home policies are enforced.  But they will be, and we are more optimistic, that in 2 months, the worst will be over.  Markets will scent this outcome early on.

China has begun to recover from the Coronavirus, which first spread widely in mid-January, and led to a 10-week shutdown.  Factories are reopening, and most Chinese are back to work.  Export demand, however, will remain very weak.  Our best hope is that the US and Europe will recover from this short-term depression by the end of May/early June, and this should indicate a bottom for the market in the next few weeks.  Asia has, in our view, seen a bottom; and the best shares – in technology, pharma, insurance, e-commerce – are now in a buying range.

                                                                                                            April 1st, 2020

                                                                                    [from a “Virtual” Hong Kong] 


Writing in the last week of February, everything depends on the global impact of the Corona Virus, or COVID-19, as it has been renamed.  Our information from China indicates that cases there have peaked, and are beginning to subside, thanks to the draconian measures taken by the Chinese authorities to contain the virus in Wuhan.  Although there is always some doubt about the Chinese statistics, we believe that the virus will burn out as the weather warms up in the 2nd quarter, and that it will follow the normal trajectory of flu infections like SARS in 2003. 

The real concern now is the spread in Japan, South Korea, Iran, and Italy, to name the countries which have most recently reported increasing cases.  Judging by the complete slowdown or stoppage of transport, travel, and trade in China, we are going to see something similar in these other countries; and, eventually, this could affect the European economy as a whole.  Our best guess is that there will be a sharp GDP slowdown in the 1st quarter, and some increase in inflation, both in the US and in Europe.  The global share markets are correcting sharply at this time, and gold and bonds have risen as safe havens.

However, the CDC in Atlanta has just announced that it expects the Corona Virus to spread to the US, and could significantly slow the US economy in 2Q, and perhaps impact the November presidential election.  These imponderable factors are now weighing on investors’ minds, after the year started with optimism and complacency.  Ironically, in China, where 95% of cases have occurred, there is now greater optimism that the worst is over.

Our investment strategy is to hold on to our core positions in China, Taiwan, South Korea, and SE Asia, because we believe there that will be a strong rebound, particularly in the technology sector, within the next 2 months.  Another market which is relatively unaffected, is India.  Although GDP has slowed down to below 5%, we have seen a meaningful recovery in the manufacturing PMI, and in new orders this month.  Earnings in the past quarter have also been stronger than expected, with 17% growth in net corporate profits for Indian companies.  The Indian budget was recently announced, with nearly $30 billion worth of privatizations planned; and some investor-friendly measures to abolish dividend distribution tax, and reduce income taxes for lower – and middle-income taxpayers.  We believe that Prime Minister Narendra Modi, like Donald Trump, is disliked by the liberal media, but is, in fact, implementing pro-business policies, which will lead to a stronger Indian economy and stock market. 

Elsewhere in SE Asia, there is clearly a very negative impact on countries such as Thailand, Malaysia, Singapore, Vietnam, and Indonesia from the sharp slowdown of Chinese investment and, most importantly, tourism, which has been a big contributor to this region in recent years.  Our hope and expectation is that this will be a short-lived phenomenon; but the more worrying aspect is the impact on supply chains, especially automobiles and electronics with components coming from Chinese factories.  Hyundai has stopped production in South Korea, for example.  There are even concerns about pharmaceutical products depending on Chinese ingredients in antibiotics and paracetamol, for instance.  Clearly China’s dominant role as a supplier of low-cost goods will be called into question by the disruption caused by virus.

Hong Kong is the worst affected region, with almost 90% fall in tourists coming from China, in retail sales, and hotel and restaurant bookings.  Our two major holdings, AIA and Link Reit, have not been much affected by the slowdown; and we believe that Hong Kong will continue to represent an important gateway to China in the years to come, with 70% of inward foreign direct investment going through the territory.  Chinese private companies’ debt financing in Hong Kong has more than doubled in the last 5 years, so its importance for China as a financial center has in no way diminished. 

Looking longer term at investment themes, we have been very struck by the rapid growth of electric vehicle sales, and the focus on ESG and climate change, among investment managers, which is leading them to dump oil shares and buy companies like Tesla (which most investors agree is extremely overpriced).  The other themes, which we have focused on in our Asian investment strategy, are e-commerce and electronic payment systems, which are more advanced in China than anywhere.  We still believe that emerging markets will outperform developed markets over the next 5 years because of their favourable demographic trends, especially those that are less exposed to trade tensions between the US and China.  We are also looking for ways to play the megatrends of growth in data, artificial intelligence, and cyber security. 

Source: JP Morgan

The advent of 5G in the telecommunications sector is going to be an important theme, not only in China but in many developing countries, and in Europe; and Chinese companies will clearly play a central role. 

*The full quotation from John Donne’s sermons:

No man is an island entire of itself; every man is a piece of the continent, a part of the main.  If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend’s or of thine own were.  Any man’s death diminishes me, because I am involved in mankind.  And therefore never send to know for whom the bell tolls:  it tolls for thee.  [John Donne]

Robert Lloyd George

28 February 2020

Hong Kong

Treasure Island

The global markets last week have been dominated by news about China’s new “Corona virus.”  It is impossible to say (on January 31st) what may be the economic and market impact:  The only comparison we have is with the 2003 SARS outbreak, when our 50 staff in Hong Kong worked from home for 2 months.  In China and the region, 800 people died, about 10% of those infected.  This time, there is only a 2% mortality rate, even though infections are growing rapidly.  Our best guess is that it will be regionally contained; and by March/April, economic activity will rebound rapidly.  My final observation on this Chinese epidemic is that it will undermine the absolute controlling activity of the Chinese Communist Party, just as Chernobyl in 1986 eventually undid the USSR.  Information has to flow freely in a medical emergency; and, eventually, people will rebel against internet censorship when it affects their lives and their family’s health.

On January 25, I had the opportunity to attend a private meeting in London with US Treasury Secretary Steven Mnuchin, and I asked him whether he thought that the “Phase One” US-China trade deal would work to restrain China’s model of “state capitalism” and protect intellectual property.  Apart from balancing the US-China trade deficit in the short term, the challenge in the long term is to get China to follow the “fair trade” norms of the WTO; and President Trump deserves some credit for forcing this issue, in which he has been closely followed by Canada, Japan, and the European Union.  (They all have trade deficits with China.)

We cannot yet forecast the outcome, but one thing is clear – China’s breakneck growth economy period from 2000 to 2016 is finished – it will grow at a normal pace of 3% to 5% in the future.

Also, China has agreed to open up its financial sector and stabilize the Renminbi.  Many foreign banks and fund managers are already taking advantage of this enormous opportunity.  It is estimated that there are over US$6 trillion of domestic savings in China.

China outspends Taiwan on defense by 15 times.  The assumption has always been that China would be deterred from an invasion by the implicit bargain that the US would come to Taiwan’s aid.  Now China has intermediate range missiles, which can reach US bases in Japan and Guam. 

In February, President Xi and the PLA Air Force released a music video called, “My War Eagles are Circling the Treasure Island,” likely to preempt any doubts that they would act, should Taiwan attempt to declare independence.

Why does China regard Formosa, or Taiwan, as a Treasure Island?  Primarily because the “Treasure” is the Last Emperor’s collection of Chinese antiques housed in the heavily fortified National Palace Museum north of Taipei.  This was carried by KMT soldiers, escaping from the mainland in 1948 in about 24,000 crates.  It has a symbolic, almost religious, meaning for the Chinese people.

The other “Treasure” in Taiwan is TSMC, Taiwan Semiconductor Manufacturing Corporation, which is the world leader in fabricating microscopic chips with 5 nanometer width (the best that China can do is 28 nanometers).  Indeed, TSMC is on track to deliver 3 nm by 2022. 

The re-election of President Tsai Ing-wen of the DPP, in January, has shown a surprising swing among Taiwanese voters against the Mainland, in particular, because of their reaction to recent events in Hong Kong. 

In the meantime, we have invested not only in TSMC (up 100%) but also Wiwynn, a leading manufacturer of servers for “the Cloud.”  The Taipei market, up 15% in 4 months, has outperformed the region and South Korea (up 11% over the same period).  Samsung Electronics has had a strong recovery (up 31% in the last 6 months) on the back of recovering fundamentals in memory and OLED, as well as strong smartphone performance.

President Tsai of Taiwan gave an interview to the BBC on January 15, asserting that China must treat Taiwan “with respect,” and skirting dangerously close to the “Red Line” of independence.  There is no doubt that China is increasingly prepared for the military option; they may exercise the economic option first.  China accounts for 30% of Taiwan’s total trade.

In the meantime, the Chinese New Year of the Mouse (or the Rat) began on January 25; and there is no doubt of President Xi Jinping’s confidence in his remarks to senior aides recently.  China has deftly dodged US tariffs by shifting trade volumes to other countries in Southeast Asia; and, overall, exports are up 7% year on year, and China’s share of world trade has been maintained.   It will be tough for the USA to keep China down, even if its growth rate slows.  We expect technological and medical innovation in China to continue, but (February 3) it is true to say that the closure of the US border to Chinese tourists, and businessmen, in the wake of the virus, will have a deep and widespread effect on economic activity, also in the technology sector.  We are becoming more cautious about the 2020 outlook, and, fortunately, have a hedged short position in the Hang Seng Index.

India looks set to continue its steady business recovery under Prime Minister Modi, in particular, bank lending after the 2019 squeeze in the sector.  The new budget (which we will comment on next month) appears to be pro-growth and pro-business. India will be less affected than SE Asia by events in China.  

We wish all our readers a happy and prosperous Year of the Golden Rat!

Robert Lloyd George

3 February 2020 Hong Kong

Swine Fever and the Gold Price or, Forecasts for 2020

There seems to be a degree of complacency in the market, after an almost 30% rise in the S&P 500 in 2019, that the benign trend will continue in 2020, that President Trump will get re-elected, the dollar will stay strong, inflation will be subdued, and there will be no rise in interest rates.

My own view is different. The conclusion of Phase One of the US/China trade deal has released a lot of tension and anxiety in business circles, capital spending and trade are likely to recover in the coming months. This is especially good news for Taiwan, Korea, and the Asian Emerging Markets. The dollar has peaked, and in the past month has already fallen 2% on its trade weighted index. There are distinct signs of rising prices in several areas of the commodity complex, including gold, silver, and energy prices. Some foodstuffs will also be in short supply and demand will strengthen as China ramps up its agricultural purchases from the US.

In China itself, there is a definite slowdown towards 5%, and perhaps lower, despite continuous support from the authorities and a recent injection of US$120 billion into the financial system, by lowering bank reserve ratios. The real challenge for the Chinese leadership is the dramatic impact of the swine fever, which has meant that 60% of China’s pigs have had to be slaughtered, pork prices have more than doubled, and the consumer price index was recently rising at 4.5%. There is no doubt that inflation will be a problem in China, in the coming year.

Globally, with unemployment at its lowest level for more than a decade, wages are likely to rise, and inflation will finally respond to the central bankers’ wishes, and rise clearly above 2% in Europe and the US. What will happen to negative interest rates in Europe and Japan, and the 10-year US Treasury below 2%? We expect that 2020 will see the end of this monetary experiment.

Emerging Markets have now underperformed developed markets, for more than 10 years. In 2020, this will decisively reverse. A clear recovery in the technology cycle will favour Korea, Taiwan, and China, which constitute 57% of the Emerging Market Index. For the rest, strengthening commodity prices will boost returns from Russia, Brazil, and other Asian nations.

We remain, however, somewhat cautious about the situation in Hong Kong, which is, depressingly, continuing to be fraught with daily and weekly violent demonstrations, and lack of dialogue between the authorities and the protestors. We make no forecast here about what may happen in the next 6 months, but business conditions are, to say the least, not propitious; and many companies are looking for alternative locations.

In India, meanwhile, Mr. Modi’s decision to support a new citizenship law, and a national register for citizens under Home Minister Amit Shah, has raised alarm among the Muslim population of India, which has grown from 9.8% at Independence in 1947, to 15% of the total population today, or over 200 million citizens. The surprise for those who have studied Indian history, is that there has not been more intercommunal violence, during the first Modi term of office. We continue to believe that Mr. Modi is a pro-business reformer, who has passed important tax and banking reforms, which will support the Indian capital markets over time, with significant improvements in profit margins and share prices.

We have diversified our risks in our broad Asian portfolio to include Korea and Taiwan (together almost 20%), as well as Southeast Asia, where the 3 major growth economies are Vietnam, Philippines, and Indonesia. All 3 countries present challenges in terms of selecting good shares, without foreign premiums, or corporate governance issues. But there is no doubt that, with the lifting of the trade war worries, these markets should outperform in the coming year; and the same is true of India.

So, coming back to the gold price – which, at the time of writing, has risen close to US$1,600/ounce following the surprise US drone strike in Baghdad, which killed the leading Iranian general Soleimani, commander of the “Quds” force. We expect a confluence of forces will support gold and silver in 2020. Many nations in Europe and Asia, especially China and Russia, have been consistently buying more gold for their central bank reserves, as a reaction to Washington’s increasingly aggressive use of economic sanctions (using the dollar as a weapon), against both enemies and allies.

China is reputedly ready to launch its own crypto currency (and we can confirm from personal meetings in Beijing that they have been studying block chain technology at the highest government levels for several years). The Renminbi (RMB) is likely to be stable. But the key will be to follow closely any weakness in the US dollar, which, in the past, has been a clear leading indicator of market weakness.

Robert Lloyd George
13 January 2020
Hong Kong

2047 Moves Closer

When Britain and China agreed on the Handover of Hong Kong in 1997, with the understanding that “One Country Two Systems” would allow Hong Kong to preserve its traditional freedoms, Deng Xiaoping said that by 2047, China and Hong Kong would be indistinguishable, and the merger would be completed (as well as a 50 years extension of all property leases).

Recent events in the “Special Administrative Region” have moved that date closer. Following the violent attacks on the New China News Agency offices, and several mainland China banks, with petrol bombs, rocks and other weapons. China has quietly decided to take a stronger line in enforcing “Patriotic Education” in Hong Kong schools, and press freedoms are being slowly curtailed. For the time being, the British legal system, and the Final Court of Appeal survive – a fundamental assurance of fair play (and no corruption) to the business community. But the subtle pressure is growing on, for instance, the Chief Executive of Cathay Pacific, who was forced to resign after expressing support for some of his employees who joined the protests. Money talks: and the ability of an airline, or a bank, or any foreign company, to operate freely in China, is always subject to politics.

For anyone, like the author, who lived in Hong Kong in the Golden era of 1982-1997, these are sad and depressing developments which do not presage such a happy future. When I arrived in Hong Kong in March 1982, I was astonished by the laissez-faire dynamism and energy of the place – a “barren rock” in the South China Sea with no natural resources, a refugee population of 6 million Cantonese (98%), Filipinos, and expats from Europe, Japan, America, Australia – from almost everywhere.

There was a flat income tax of 15% for everyone – so if you worked hard, you kept 85% of your salary and bonus – what a contrast to Britain or European welfare states! Even if property seemed pricey (it is now 3 or 4 times more so) everyone was there “temporarily”. It was fairly said that it was the only place in the world when you could have a good business idea in the morning, incorporate by lunch time, and be making a profit by the end of the day!

The legendary British Financial Secretary of the 1960s, Sir John Cowperthwaite, was so convinced of “Laissez Faire” that he would not allow his civil servants to collect economic statistics in case they were tempted to intervene – The Chinese Sage Mencius called it “Wu Wei” or “Do Nothing”. Margaret Thatcher used to repeat the old Chinese adage that the best way to govern a Kingdom was like cooking a small fish (ie. don’t meddle).

Hong Kong in its heyday was a marvelous practical demonstration of Libertarianism applied to daily life and business: minimal government; no welfare; just guaranteed law and order. But sadly in the past 5 months that seems to have broken down. The trust between the people and the local government and the police force, is inseparably fractured, 2047 is rapidly drawing nearer.

Meanwhile in China, where the use of facial recognition has been perfected, they are now adding “emotional recognition” which sounds like science fiction but may enable police and authorities to anticipate crimes or violent acts.

In any case, the “animal spirits” of investors in Hong Kong and China have already revived. Hong Kong share prices have jumped 5% from the bottom. China A shares have outperformed (+32%) the S&P500 (+25%) in 2019.

China is not going to be held back, though its economy will certainly slow in the next 3/4 years. Its national effort to catch up in technology, AI, renewable energy, batteries, high speed trains, medicine and biotechnology, 5G communications, blockchain financial technology, via its domestic consumer brands as well as domestic oil and gas production – none of these trends will reverse.

The Hong Kong District Council elections, on November 24, had a 71% turnout and resulted in “pro-democracy” candidates winning 80% of the seats. Although this has little real political consequence, it sends an important message to Beijing. Also, recent demonstrations have been larger in size, and mainly peaceful. There is some hope of calm and dialogue in the next few months, although HK’s economy has suffered from a 43% fall in visitors, especially from Mainland China, and a 24% decline in retails sales.

The Indian economy presents a conundrum, having slowed to 4.5% but, nevertheless, showing the promise of recovery in 2020 as the banking system and property market are cleaned up. Structural reforms, such as GST and demonetization, have slowed down capital formation (insert chart) and economic growth. The business community is having to make a real adjustment to more transparent lending and reporting and more efficient tax collection: all good developments in the longer term. The Modi government has also announced the privatization or listing of 33 public sector companies, including BPCL.

The Bombay stock market has held up well, although India’s Business Today magazine highlights that only 9 stocks, including HDFC, Reliance, ICICI Bank, HDFC Bank (among our largest holdings) have attributed 93% of the market gain of the past 2 months: quality companies, in terms of balance sheets, corporate governance, and earnings growth. Much of the US$13.2 Bn. invested in India by international investors has come in the form of ETFs, although Indian investors also added US$8 Bn.

We expect some “truce” in the US/China trade dispute by December 15 (the due date of the tariffs), which will be a powerful positive signal from US and Asian markets before year-end. Also Boris Johnson’s victory in the UK election will speed up Brexit, and remove uncertainty for international companies. Free trade, rather than protectionism, may be the trend in 2020, further boosting investors’ confidence.

We wish all our customers and readers a very healthy and happy Christmas and all best wishes for the New Year.

Robert Lloyd George
16 December 2019
Hong Kong

The Victory of Light

Reflecting on the situation in Asia at the beginning of November, we can look forward to the winter solstice, when the time of darkness is past, and the shortest day passes into greater sunlight. In the political sphere, we can see the return of mutual understanding, after estrangement and confrontation. This is becoming visible in the truce between the US and China on trade firstly; secondly, and hopefully in the final stage of the agonising Brexit process in Britain, with some hope of reconciliation with Europe in 2020. Thirdly, and lastly, from our Hong Kong office, the hope is that the worst is over after the last four or five months of political demonstrations and violence. Now, new leadership is needed to address the deep seated problem of inequality and the lack of opportunity for the younger generation (most of the Hong Kong demonstrators are teenagers). This is a global theme, although inequality is more extreme in Hong Kong where the median property price is 21x median income (compared to 8.8x in San Francisco, 12.6x in Vancouver and the US average of 3.9x.)

One political forecast we may anticipate is a swing to the left in 2020 perhaps in Europe as well as in the USA, with political leaders trying to address this inequality, through higher taxes and wealth redistribution. President Trump’s impeachment process may impact global markets in the first quarter, and the US dollar may weaken against Asian and global currencies. There is also a risk that inflation might reappear (notably in China where CPI has now reached 3%, owing to the doubling of pork prices this year). This would imply an end to the extraordinary period, through which we have passed, of negative real and actual bond yields, across the developed world, and probably will result in a recession by 2021.

Against this background, we are nevertheless confident that the Asia ex Japan region will outperform, especially Southeast Asia and India owing to their favourable demographics, political stability and underlying growth of consumers’ spending.

In India, for example, we have seen the beginning of an end of a severe monetary squeeze in the past six months, now resulting in an improving earnings picture and the bottoming out of economic growth, which has fallen from 8% in 2018, to about 5% in the last quarter of 2019. Our expectation is that Mr Modi’s second term, which will run till 2024, will result in more pro-business policies. We have seen the corporate tax rate cut, from 30% to 25%, and to 17% on new business, which makes India with its large low cost labour force, competitive with Hong Kong, Singapore and other low tax East Asian export economies. India’s government, under the BJP, has realised that power to harness the national energy towards wealth creation, depends on a smaller role for government, and a reduced tax burden.

Another positive development is the bottoming out of technology cycle, with a renewed emphasis in our investment strategy on Taiwan and South Korea. The introduction of 5G in China and other countries will engender a new cycle of demand for hardware, especially servers. One reflection of this cycle may be that Japanese machine tool orders may have bottomed out, after a very steep fall of 35% yoy, for the past two years. Another interesting development is that China’s government has recently embraced the Blockchain technology (perhaps to avoid the US dollar payment system) which has prompted a rally in blockchain related shares in China. We are monitoring the implications of this step carefully.

We believe that it is, medium term, rather bearish for bank share prices, and we have, for example, seen this week HSBC declaring disappointing profits, and a reduction in their manpower, and the sale of notable subsidiaries like France (over 90% of their profits are coming from Asia, notably Hong Kong and Southern China).

China’s oil production

China wants to be more independent in its trade and current account payments, and also in its energy needs (currently 70% imported from Middle East and Africa). We have selected a private Chinese fracking energy equipment provider which will benefit from this drive for energy independence.

The Hong Kong economy will almost certainly have had a recession in 2019, after two quarters of slowing growth. The severe impact of the political unrest and violent demonstrations on the tourism and retail industry, have affected hotels, restaurants and shops all over the territory. Property transactions have surprisingly held up, because of the recent decision by the Hong Kong government to allow 90% mortgages for properties up to HK$8 million (US$1 million). Nevertheless, we would be cautious about the outlook for Hong Kong property, given the high valuation level today. We are looking carefully for buying opportunities in Hong Kong shares, at this very depressed level, after such a difficult year. Our experience of the last 40 years of Hong Kong, suggests that the economy and the people of Hong Kong have great resilience, and buying opportunities occur during times of unrest and uncertainty like 1966, 1983, 1998 and 2003 during the SARS outbreak. At the same time, there has been undoubtedly some shift of wealth and corporate activity, from Hong Kong to Singapore, and we continue to look positively on the Singapore market as a centre for wealth management, banking, insurance and trade finance for Southeast Asia.

There are positive political developments in Indonesia, and large infrastructure projects. Our team of research analysts continues to scour the Southeast Asia markets for good stock picks, especially in the area of Renewable Energy. We recognise the importance of including climate change as a factor in future investment returns: although, truthfully, coal will likely represent 75% of electricity production in SE Asia until 2040 – as it has done in both China and India – we are researching opportunities to invest in hydro, solar, and wind power: and in the development of electric vehicles in Asia.

In general, we have become more cautious about Asian Frontier markets, and have now excluded Pakistan, Bangladesh and Sri Lanka from our Indian Ocean Fund because of the extreme lack of liquidity, and tradability of shares. The only Frontier market which we continue to favour, is Vietnam, which has adopted a positive policy towards foreign investors.

Robert Lloyd George
4 November 2019
Hong Kong

Looking Forward to 2020

As we enter the 4th quarter of 2019, after a volatile and difficult summer in world markets, we are conscious once again of the impact of politics on global equities which has become more and more evident. At the time of writing, President Trump is facing the inception of a possible impeachment process, which must weaken his political position approaching the November 2020 presidential elections. Our interpretation of this situation is that it increases the probability that Trump will reach an accommodation with China on the trade dispute in the next 3 to 6 months, because of his need to get reelected, and to boost the US economy, especially in the Midwest and other marginal states. China would be happy to commit to major increases in their imports of US soy beans, corn, wheat, natural gas, and other basic commodities, for which they have pressing need. This would be a “win-win” deal for Trump and for China, and would boost his reelection chances.

Having said that, we are conscious that our optimism in this regard has been misplaced over the last 2 years; and politics are always unpredictable. (The Brexit situation, in its final 3 weeks, is another example of the impossibility of predicting political outcomes, and constructing a rational investment thesis therefrom.)

The National Day in China on October 1st marked 70 years of communist rule since Mao Zedong took the podium in 1949 and said “China has stood up.” Xi Jinping echoed these words and said, “Nobody can keep the Chinese people down, or stop the growth of the Chinese economy.” These words are worth pondering, because of the very negative US press about China. Our Chinese team in Hong Kong is closely observing the trends in consumer spending in major Chinese cities, and they continue to be strong. There are a number of key companies, in food, pharmaceuticals, solar panels and other sectors, with earnings growth of 50% or above. We have recently expanded our research in the A-share market, and have found some outstanding investment opportunities. A trade deal would, of course, boost the whole market; but the key is the domestic sentiment in China, both for consumers and for investors. We hope to see this improving in 2020.

The Hong Kong situation is still very fraught and unpredictable, and has escalated into further violence in the past few days. Both tourism and retail spending have been hard hit, and even restaurants have felt the sharp downturn. The Hong Kong stock market, however, has been flat for this year, and has not been unduly affected. Indeed, they have successfully listed the Budweiser Asian subsidiary in Hong Kong in the last few days. Nevertheless, Xi Jinping reiterated his intention to abide by the “one country, two systems” principle, meaning hands off Hong Kong and allowing the local authorities and police to resolve the situation. We are hopeful that things will calm down in the autumn and winter period, and that some compromise will be achieved.

The table shows the relative position of Hong Kong, which has declined from over 25% of China’s GDP in 1990, to less than 3% today. Hong Kong’s salaries and rents are also much higher than neighbouring Shenzhen and Southern China.

Meanwhile, in India, we have had a very volatile market owing to the squeeze on banks and corporate borrowers which has made it very difficult for companies to obtain funding, despite declining interest rates. This financial tension was somewhat alleviated by Mr. Modi’s announcement of a corporate tax cut at the end of September, just before his visit to the USA, which boosted investor sentiment and will, we believe, result in a stronger economy and stronger earnings growth in 2020. We are currently estimating 15-20% growth in corporate profits on a forward PE multiple of 16 times. Infrastructure projects are going ahead at a rapid pace, and this will result in increased employment and consumer spending. We have refocused our Indian Ocean Fund on the core Indian blue chip companies, with good liquidity and strong fundamentals, and have reduced our exposure to Asian frontier markets such as Pakistan, Bangladesh, Sri Lanka and Mauritius. The only Asian frontier market which we continue to like is Vietnam, which is experiencing near 8% GDP growth, with a strong inflow of foreign direct investment and rapidly growing exports – for instance by Samsung Electronics, which accounts for 20% of Vietnam’s foreign trade.

Elsewhere in Southeast Asia, we have seen strong consumer spending and large infrastructure projects announced in the Philippines and in Indonesia, where we have increased our exposure to banks, consumer, and construction. The president, Joko Widodo, announced that Indonesia (a nation of 250 million), would be spending over US$30 billion on a new capital in Kalimantan, or southern Borneo (owing to the rising sea levels and flood problems in the capital, Jakarta). All of this will boost growth and investment opportunities in this large and important emerging economy.

In conclusion, we remain positive about the outlook for Asia, despite all the setbacks and difficulties which have arisen as a result of the trade war. The desire of Asian middle class consumers for a better life, with more consumer goods, more travel, better education and better housing, is not going to slow or stop. We have reached the second stage of Asian development after a 30-40 year rapid expansion in exports and living standards. For the next few decades, the emphasis will be on quality of life, more green energy, better water supplies, less air pollution and improved educational and cultural opportunities for the young people of Asia. We are looking for investment opportunities in these areas as we move forward into 2020.

Robert Lloyd George
9 October 2019
Hong Kong

After the Summer Doldrums

This summer has been a volatile period in the US market, as well as in the Chinese world, because of the uncertainty about the US/China Trade War and the continuing unrest in Hong Kong, for which we cannot forecast a clear resolution. At the time of writing, the G7 meeting has just concluded in Biarritz, and President Trump’s remarks on trade have, again, increased market volatility, with high frequency trading algorithms responding to key words in his tweets and press conference.

Nevertheless, the US economy continues to be strong. Corporate earnings have exceeded expectations, consumer confidence is high, retailers have reported very strong results and interest rates remain at all-time historic lows. Despite the briefly inverted earnings yield on treasury bonds, most market forecasters are not yet predicting a recession, perhaps not until 2021.

However, anxiety in Europe and Asia remains high, and the level of caution in the global markets means that we are not approaching bubble levels. Value stocks are trading at 44-year lows compared to growth stocks. The pound is at a 35-year low to the dollar. US share prices are at a 50-year high, relative to US GDP. Bond yields are at all-time lows, and there are now over US$16 trillion worth of bonds in Europe and Japan with negative interest rates.

The question of when the US recession begins, is critically important to the outcome of the November 2020 election. Until recently, the market had comfortably assumed that President Trump would be re-elected; but if that certainty begins to deteriorate, and a more leftwing Democratic candidate is selected, then the risk to the market will correspondingly increase. If US growth continues at around 2% and inflation and interest rates remain low, Trump is likely to be re-elected, but not if we are in a recession.

To a seasoned observer, it appears that there is, therefore, no alternative to high yield dividend paying stocks for the retired investors, or pensioners, or even large insurance company funds. The Norwegian Fund, for example, has over 70% in stocks now. Gold is making a comeback in the world financial system. China, Russia, and other emerging nations are buying gold for their central bank reserves at a rapid pace. Worldwide debt has reached almost US$250 trillion, or 320% of world GDP, up by 20% since 2012. This is the biggest danger to global markets and, if inflation should rebound in 2020/2021, then the impact on interest rates and markets would be very fast and very severe.

China’s economy has held up well in the face of the US trade tariffs; GDP is still above 6%. Latest retail sales numbers are growing at 7.6%, and on-line sales at 16.8%, although auto sales have fallen 4%. We have a two-track market in China, with the domestic consumer continuing to demonstrate robust confidence, and industrial output, exports and infrastructure all slowing down. The areas where we see high growth are cosmetics, skincare, sportswear, sports shoes, dairy products and yogurt, Moutai, or spirits and beer and wine, which are all growing almost 50% year-on-year.

Even the property market in China is holding up, showing 9% annual appreciation in sales, although new supply is diminishing and developers are holding back inventory. Mortgage rates are above 5%, against an inflation rate of 2.8%. With Alibaba announcing 40% year-on-year revenue growth, we cannot be completely negative about China’s outlook. It is, in any case, a very large continental economy, like the USA, where different regions and sectors have very different growth rates.

When we turn to Southeast Asia, we see the broad ASEAN economy growing around 5%, with higher growth in Vietnam and more sluggish growth in Singapore. Again, the consumer is the key in this region’s growth, with particularly strong earnings in Thailand and Vietnam. The Indonesian government has announced a US$33 billion project to build a new capitol in Kalimantan (Borneo) because of the growing flooding problem in Jakarta. We continue to favour the consumer and IT sectors in Vietnam, which, with a young population of 100 million, has a large inflow of foreign direct investment.

The renminbi has weakened to almost 7.2 to the dollar, and this has a regional impact with other currencies also depreciating, such as the Australian dollar and the Korean won, notably. The two strongest currencies in Asia are the Japanese yen and the Thai baht, and these may emerge as safe haven currencies for investors just as the Swiss franc and, perhaps, the Norwegian krone, are in Europe. There is no doubt that Asian demand for gold is also growing (and much of the demand for cryptocurrencies is also coming from the East).

The European outlook continues to be clouded by the unknown impact of Brexit, whether “no deal” or with a new agreement on the Irish back stop, by October 31st. We have barely two months to go, and the German economy, meanwhile, is already in recession with a pronounced slowdown across the whole Eurozone. Some of this is due to the slowdown in Chinese demand (German exports to China are down 7.5%), since China has become Germany’s leading trade partner. In addition, the fall in oil prices has curtailed some of the demand from the Middle East for capital and consumer goods. There is an outside risk, however, that we see a showdown with Iran approaching in September, and causing a spike in oil prices, which would negatively affect Europe and Asia. (The US is in the fortunate situation of having raised its oil production now to over 10 million barrels a day since fracking came in a few years ago, and is, therefore, much less dependent on imports than it used to be.)

The Indian economy is in a sharp slowdown, and the next two quarters of corporate earnings will disappoint. The banking sector is suffering from high levels of nonperforming loans and questionable accounting practices, by the major international auditors which have led to their being banned from major Indian banks. The Reserve Bank of India has become much more vigilant, and a crisis of confidence has resulted from the Modi government’s reform measures in goods and services tax, a new bankruptcy code, and new real estate regulations, which have choked off growth in the short-term. Banks are scared to lend, and corporates are being starved of cash. The slowdown in auto and real estate sales has led to unemployment, and severely hurt domestic consumption.

We expect a strong pickup early in 2020, when the forecast is still for earnings growth of 20% and nominal GDP of 10%; but these forecasts can be downgraded, and the monsoon season in India has been very uneven with severe flooding in two or three states in western India. One of the few bright spots is Reliance Industries, which is doing well in all three segments of their business: oil refining (with a big injection of capital from Saudi Arabia), retailing, and telecoms (both of these last divisions will be spun off in separate listings over the next two or three years). Despite the US downgrading India’s status as a trading partner, we continue to see big opportunities in the IT sector for Tata Consulting and Infosys.

At the end of August, the government announced a US$10 billion injection into state banks and other stimulus measures, including the withdrawal of the foreign portfolio investor tax and some incentives for the automobile sector.

Conclusion: The investment outlook has never been more difficult to forecast but with very low interest rates and a general atmosphere of investor caution and pessimism, the odds are that stock markets will surprise on the upside, particularly where dividend yields are high and sustainable. There is still plenty of excess savings and capital available, as we see from the bubble in private equity. Our worries are about what happens when the current inflated debt bubble meets a real slowdown or recession in 2020 or 2021; but our immediate focus is on corporate earnings, in the first half of 2020, and the political outlook, both in the USA as well as Europe. Writing from our Asian HQ in Hong Kong, we are hoping that the autumn will bring a calmer period to the city and an easing of tensions with China.

Robert Lloyd George
9 September 2019
Hong Kong