“The rise of China and demography created a ‘sweet spot’ that has dictated the path of inflation, interest rates, and inequality over the last three decades. But the future will be nothing like the past – and we are at a point of inflexion. As the sweet spot turns sour, the multi-decade trends that demography brought about are set for a dramatic reversal … for a significant rise in inflation and wages, or a rise in nominal interest rates.”
China saw an increase of over 240 million in working age population between 1990 and 2017; and Eastern Europe added another 200 million, compared to only 60 million in USA and Western Europe.
China’s share of world manufacturing output grew from 8.7% in 2004 to 26.6% in 2017 (extraordinarily rapid). No wonder deflationary forces have been so strong for the past 30 years, and there has been a very rapid rise in income and wealth inequality, especially in the USA, UK and Europe, leading to Brexit, Trump, and other populist manifestations.
In the next 30 years, beginning now, there will be a sharp reduction in the growth of the labour force globally, and an increase in the aged, dependent, or retired population.
The world will increasingly shift from a deflationary bias to one in which there is a major inflationary bias. China’s greatest contribution to global growth and globalization is behind us. It peaked in 2012. China’s falling savings rate, and a rapidly ageing population, will lead eventually to a current account deficit and an end to the global savings glut which produced such extraordinarily low interest rates in the US and Europe in the past 15 years.
The two big demographic growth opportunities in the world, of the next 20 years, are Africa and India; but Africa has 54 nations and poor infrastructure. India is a single, connected market (in an area the tenth of the size of Africa), of 1.4 billion, mostly young consumers. India will beat China in global growth over the next 2 decades. It is the one major emerging market where most Western investors remain underweight, and low interest rates have been the prevailing tendency since 1981. The 40-year bull market in bonds is over; but what happens to stocks? There will be a premium for growth, and that growth will be highest in Asia, then the USA, then EU. Valuations today are lowest in Asia, about half of US valuations relative to economic output or earnings. “The 40-year trend in disinflation is ending.”
Predictions for 2021
- The US Dollar continues to weaken, especially against the Swiss Franc, gold, the Yen, and other Asian currencies – the Chinese Renminbi, even the Indian Rupee.
- The Flow of Capital from West to East accelerates, and China’s bond and stock markets, after taking in $650 Billion in 2020, exceed $1 Trillion inflow. The RMB breaks 6 RMB to the dollar.
- The price of oil recovers — after a strong economic rebound globally, and tensions in the Middle East — to US$60/barrel or higher.
- Vaccination in most Western economies will be complete by 2Q, leading to a strong economic recovery and rising prices.
- Post Covid economic recovery exceeds all expectations by summer 2021, with pent-up demand, consumer spending, travel, trade, and investments up. USA +5/6%, China +8%, India +12% vs. Europe.
- Corporate earnings exceed 30% growth in Asia and in certain sectors — technology, healthcare –but also cyclicals — airlines, hotels, autos, shipping.
- By 2H21, inflation returns +5% in Western countries, higher in emerging nations.
- Biden will lead European Allies to take a stronger line against China on trade, technology, and human rights.
- Technology sector peaks out (temporarily): surprise winners by mid-2021 include banks and oils.
- The pandemic has accelerated change in working habits, education, and society. Globalization may not regain its momentum: nationalism is on the rise.
- Focus on biological medicine is here to stay. Vaccines were created in 8 months, through RNA.
- A new investment paradigm. New winners, which will outperform, include Fintech; and inflation beneficiaries (energy, real estate, gold, bitcoin, cyclical shares). Reflationary assets, commodities, and mining.
- The size of the National Debt: US$27 Trillion! What happens if interest rates go up? Bonds will collapse. 10-year Treasury will be at 2% by end of 2021.
Our immediate view in Asia is positive with a particular focus on Japan, which offers high yields, and low price to book valuations (something which Warren Buffet also identified, when he made his $6 Bn. investment into Japanese trading companies). Both dividend payouts and share buybacks are rising. We see this trend in other Asian markets, too, and have structured a “Pacific Income” vehicle with 4% dividend yield, 2% share buyback gains, and 9% dividend growth, equaling an expected 15% annual compound growth.
China will continue to power global and Asian growth. South East Asia, led by Singapore, Vietnam, Indonesia, and Philippines, will have a strong rebound. India will stage a strong economic recovery, led by the banks. The major shift in asset allocation, by global institutional investors, will be back into emerging markets, for the first time in 10 years, and that will mainly benefit Asia.
We wish all our readers and clients a Happy and Healthy Christmas and a Prosperous New Year (of the Ox).
*A new book by Charles Goodhart and Manoj Pradhan
1 January 2021