Although recombinant DNA was first patented in 1976, it is perhaps only in 2020, with “messenger RNA” pioneering Covid vaccines from Pfizer and Moderna, that the promise of biotechnology has finally reached millions of grateful patients.  Just as Sir Alexander Fleming discovered penicillin in his London laboratory in 1928, it was only in 1943 that the miracle antibiotic was finally mass produced and became available to Allied Troops by D-Day.

We have compared the Covid 19 pandemic to a war; and just as in war time, technology and medicine are speeded up by the pressure of events, so this last year has accelerated (thanks largely to operation “Warp Speed”) the application of biotech and RNA/DNA products for general medical use.  As investors, we expect Biotech to be the key sector of the next decade, bringing a host of new products to market.

China is trying to achieve scientific leadership and technological self-sufficiency by 2030.  Under lifetime President Xi Jinping, the priorities of China’s next 5-year plan, announced at the recent National People’s Congress, are no longer just economic growth (target was 6%, now dropped), addressing income inequality (rural vs. urban) or “common prosperity,” strong manufacturing (maintained at 25% of GDP vs 11% in USA), but also tougher regulations on internet companies, such as Alibaba and Tencent.  China will become a more tightly managed economy, with a stronger SOE or state-owned sector.

The recent US-China meeting in Alaska has highlighted the gulf in diplomatic relations, which has worsened under President Biden.  China presents a challenge to Western democracies in its treatment of Uighur minorities in Xinjiang, its draconian crackdown in Hong Kong freedoms, and its continuing threat to Taiwan.  It is difficult to see how trade relations can improve against this tense background of sanctions and tariffs.

Nevertheless, China’s economy continues to recover; and the consumer sector (70% of the economy) presents us with numerous opportunities, not only in on-line businesses, such as Bilibili, and pharmaceutical leaders, such as Wuxi Biologics, but increasingly in old line value names in retail, finance, and travel.  The dramatic shift from growth and technology, to value, has mirrored a similar shift in the US market; but China’s stock market has had a more violent correction (30% to 40% in some technology names).  Could this be a harbinger of things to come?

We believe that it is a healthy correction (Central Bank crackdown on high margin financing) in an on-going bull market.  The opening up of some economies, both in Asia and in the West, may be slowed down by a “Third Wave,” or possible variants of the virus; but the rapid rollout of vaccines in the US, the UK and Israel, is promising.  Science will finally conquer the virulent disease emanating from Wuhan.

South East Asia looks like a promising area for value investors, as the recovery of energy and commodity prices improves terms of trade for Indonesia and Malaysia.  For Thailand, a recovery in tourism will be needed; and we expect that, by autumn.  India’s stock market continues to do well, and we have raised our exposure in regional portfolios to 15%.  The Budget promises more infrastructure spending, more vaccine production, and easing of taxes and regulations.

There are 5 technologies potentially changing the world in the next 10/20 years:  1) Genomics or Biotechnology, 2) Artificial Intelligence, 3) Robotics, 4) DNA processing, and 5) Blockchain.  But in the immediate future, semiconductors remain the essential ingredient for everything from automobiles to military equipment.  Taiwan Semiconductor Manufacturing Company retains a large lead over all its competitors, and China also depends on their supply.  This is, to some extent, an insurance against an invasion or military conflict, since Taiwan’s semiconductor fabs may be destroyed, and skilled engineers would emigrate.  Also, Japan and other nations would apply sanctions.

I have been very impressed by the investment insights of John Authers, formerly of the Financial Times, and now with Bloomberg.  He commented recently on the prospects for rising inflation, based on his historical analysis of monetary values, of demographics, and the labour force.  He says, “Inflation was a rare phenomenon until the 20th century, when it suddenly became the norm.  The establishment of the Fed and the First World War came immediately before the great explosion…”

Demographic trends are also important; world population grew by about 20% a century until 1900, jumped 60% in 1900-1950, and then exploded to 140% in 1950-2000 (us Baby Boomers), but will fall back to 60% in 2000-2050 and stagnate thereafter.  There is quite a close correlation between population growth and inflation; however, increased longevity can prolong consumption (at least in wealthier countries) until 80 or 90. 

“The entry of China into the global workforce was … possibly the greatest deflationary shock in history…”  A remarkable assertion.  But as we wrote last month in covering The Great Demographic Reversal, this trend has now come to an end after 30 years.

“The elephant in the room, for inflation in the 20th century, is the abandonment of currencies based on precious metals.  The temptation for a great inflation reset is a political choice; and this will probably be the route many countries choose to reduce their debt burdens …

“The Post Pandemic” period is like a post-war period.  We can study the 1921 depression, or the 1947 inflation, to imagine what 2022 will look like. 

In his remarkable history of Manias, Panics, and Crashes, Charles Kindleberger states that financial crises frequently occur in the aftermath of a war; and 1920/21 (which coincided with the Spanish flu) was a classic example, resulting in a stock market crash and 6 months’ depression (which, as Jim Grant remarked, “cured itself” without official intervention because the market cleared).

Our own experience of 2020/21 Covid, closely resembles a war, with battles won and lost, and enormous state expenditures to combat the enemy and the economic distress resulting from lockdowns.   One of the immediate results has been a financial mania, which has driven up the S&P 500 from its low, on the 23rd of March 2020, by 68% in the last year.

This week, China announced new rules for land sales.  Since 1997 and before, China’s municipalities followed Hong Kong’s Model of keeping taxes low and funding their expenditures by regular land auctions to developers.  This has inevitably caused debt to soar, and a property bubble to develop.

Now the government is trying to cool down the property market, and land prices will likely start to fall, as higher cash deposits are required from developers.  Construction and real estate are an important part of China’s economy (17% of GDP) and the major form of investment for Chinese savers(though mainly cash, not mortgages).  This could, therefore, have a broader impact on consumer confidence and wealth.  Xi Jinping famously remarked that “a house is for living in, not for speculation.”  But will there be growing political pressure on the Party if housing prices fall 50%?  They have, after all, risen 4 times in the past decade in China’s major cities.

In conclusion, we see many crosscurrents in the world, and in Asian markets, at the present time.   For example, the US dollar has made an unexpected recovery against the Euro (because of Europe’s vaccine problems).  This will help emerging markets.  Inflation is a concern as we look ahead 12 months or more.  The technology bubble is deflating somewhat (will Bitcoin follow?)   But, on balance, we believe a balanced portfolio of growth and value in 25 high quality Asian securities, is likely to outperform in the next few years.  The tremendous economic improvements in quality of life and communications, in both China and India, are the biggest factors in the world today.

Hong Kong

April 2021