1997 and its Aftermath, Today

Writing in Hong Kong at the beginning of July, I am bound to comment on recent events in the city. The violent attack on the Legislative Council building last week has shocked many observers, and although the extradition treaty has been shelved, there is growing concern among my Hong Kong friends and business contacts about the future; whether in fact the “One Country Two Systems” model agreed between the Britain and China in 1997, will be maintained at least until the 50 year term is up, in 2047.

The fact that the Hong Kong’s GDP was 20% of China’s in 1997 and is now less than 3% (and in fact is smaller than Shenzhen) is a telling indication of how much less importance China might attach to Hong Kong today compared to 20 years ago. Nevertheless, the attractions of its international financial centre, British legal system and independent judiciary, free press, free movement of people, and goods are still important, as well as the low tax rate of 16.5%. The Hong Kong dollar/US dollar peg is as sound as ever; despite many brilliant hedge fund managers attacking it, it has stood the test of time since 1983, and we do not expect it to change.  Having said that, it is probable that some individuals, and businesses, will migrate to other centres such as Singapore.  We continue to believe that Hong Kong has some of the best run companies in the Asia Pacific region, and it remains a very valuable gateway into China for trade, property, banking and insurance.  Two of our most favoured companies, are AIA, based in Hong Kong, and Ping An (in China) both in the rapidly growing insurance sector.

Despite the probability that the Federal Reserve will cut rates rather than increase them in the second half of 2019, there is growing concern that we may be approaching the end of a very long economic expansion, and that we could have a recession in 2020. There are many signs of this economic slowdown in retail, in tourism, and in trade.  For example, we have seen the number of Chinese tourists fall off sharply to certain destinations such as Thailand, where Indian tourists are taking the slack and becoming a new growth sector.  Also Chinese capital outflows have sharply slowed and their purchases of Australian and Canadian properties have ground to a halt.

The uncertainty about the trade talks between President Trump and President Xi Jinping, continues to overhang the market and we can no longer make any confident predictions about the outcome. We have shifted our attention over the last year to Southeast Asia, notably to Vietnam and Indonesia, as well as Thailand and Singapore, which have been the major recipients of foreign direct investment and transfer of assembly plants, in electronics as well as textiles and shoes, away from Southern China into these new low cost destinations.

Despite a potential slowdown in China’s GDP growth to perhaps 5 or 5.5%, we still see domestic consumption and tourism growing at nearly 10%. In June, Chinese consumers’ purchases of domestic brands have outstripped foreign brands for the first time – one consequence of Trump’s trade war.  Luxury cars, cosmetics, and LVMH type purchases continue to do well despite a fall in the overall automobile sector.  We are now researching more deeply into the most successful consumer brands such as the hotpot chain, Haidilao.  Also, BiliBili and Weimob, are two of the fastest growing online apps which are very popular with the millennial generation (aged 15 to 24) in China (numbering some 300 million young consumers).

We expect the Reserve Bank of India will continue to cut rates after its 0.25% cut in June. The 10-Year India Government bond yield has also fallen below 7% as inflation has eased.  The Indian budget was announced on 5 July by the new Finance Minister, Mrs Nirmala Sitharaman, and although taxes on the wealthy have increased, there is more support for the rural poor and small business.  In the second half of this year, we expect the economy to pick up with the low oil price, stronger capital spending and lower interest rates.  It has been however a shock to see that the US terminated India’s trade classification as a developing nation under the GSP (Generalised System of Preferences) trade program. This does not have a broad impact because of India’s relatively limited exports, mainly generic drugs and software programs.  We do not believe therefore that the Indian market will suffer, but it is a negative development.  We have hitherto seen India as a protected market from the US-China trade tensions.

South East Asia continues to grow at an average of 5%, led by Vietnam and Indonesia, both having more progressive pro-business governments, focused on improving infrastructure, as well as middle class consumers. The growing impact of foreign direct investment from China, as well as the rest of the world, is favouring such companies as Siam Cement, Ayala Land, Hoa Phat (factory construction in Vietnam) and Ace Hardware in Indonesia. Over the next decade, our belief is that ASEAN could be the most rewarding (and hitherto underrated) region for investors, so we are progressively increasing our SE Asia weightings in our regional funds.  This includes Singapore, where we are making a program of research visits this week, in technology, real estate, finance and telecom.



Robert Lloyd George
10 July 2019
Hong Kong