“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

  1. 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.  
  2. 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.
  3. The price of oil recovers — after a strong economic rebound globally, and tensions in the Middle East — to US$60/barrel or higher.
  4. Vaccination in most Western economies will be complete by 2Q, leading to a strong economic recovery and rising prices.
  5. 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.
  6. Corporate earnings exceed 30% growth in Asia and in certain sectors — technology, healthcare –but also cyclicals — airlines, hotels, autos, shipping.
  7. By 2H21, inflation returns +5% in Western countries, higher in emerging nations.
  8. Biden will lead European Allies to take a stronger line against China on trade, technology, and human rights.
  9. Technology sector peaks out (temporarily):  surprise winners by mid-2021 include banks and oils.
  10. The pandemic has accelerated change in working habits, education, and society.  Globalization may not regain its momentum:  nationalism is on the rise.
  11. Focus on biological medicine is here to stay.  Vaccines were created in 8 months, through RNA.
  12. 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.
  13. 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

Hong Kong

1 January 2021

A New Map of Global Energy*

Just before Covid 19 hit the USA in February 2020, US oil production hit an all-time high of 13 million barrels a day, more than Saudi Arabia or Russia, and triple the level of 2008.  This single statistic illustrates how global geopolitics has been upended by a dramatic and rapid shift in the oil industry, and reduced the importance of the Middle East.  In his new book, Daniel Yergin brilliantly analyzes the impact of the new global energy “map” on the USA, Russia, China, and the Middle East, with additional chapters on climate change and electric cars.  It is clear that the outcome of the US Presidential Election, on November 3rd, will be particularly important for the oil and gas industry, since Biden has embraced the “Green New Deal” program of the more radical Democrats. 

China is, of course, our special focus in these monthly letters, given its economic and market importance.  China also represents, today, almost 25% of world energy consumption, including coal, which is 60% of its total energy, compared to 11% in the USA.   China, today, is the biggest consumer for oil flowing out of the Persian Gulf, and through the South China Sea – hence, the importance to China of the “9 Dash Map,” and their historic claims to the Spratly and Paracel Islands, which (illustrated with Map overleaf) they have now militarized – a claim that is rejected by the US, Vietnam, Philippines, Malaysia (and the World Court in the Hague).

Source: The New Map: energy, climate and the clash of nations.  David Yergin

In Chart 2, showing emissions by country, it is clear that China, with nearly 30% of global CO2 emissions, is, by far, the worst pollutant on the planet, double the USA, almost 3 times the EU, and 4 times India.  The “Green New Deal” in the USA, and Ursula von der Leyen’s plan for “zero carbon” Europe by 2050, will make very little difference, unless China does something radical.   (At the UN on September 22, Xi JinPing said China would try to achieve “zero carbon” by 2060.)

Source: The New Map: energy, climate and the clash of nations.  David Yergin

About half the electric vehicles sold worldwide are in China; but, in Chart 3 one can see that cars only represent 11% of emissions, compared with electricity and heat at 42%; and electric vehicles increase the demand for (often coal-generated) electricity.  Electric cars are not the end of the oil era.   China is also aiming at 250 airports by 2030, and already has over 25,000 km. of railways, and 130,000 km. of highways.  Through the “One Belt One Road” strategy, China is exporting massive energy-intensive projects to countries like Pakistan.  Electricity demand is growing 8% p.a. in China (it is flat in US and EU), and air pollution is still a massive problem.

Source: The New Map: energy, climate and the clash of nations.  David Yergin

In relative Terms, China has had a good pandemic, which has accelerated the shift in the economic balance away from the west and towards Asia.  China’s economy will be the only major one to record +3% growth in 2020, whereas, for instance, Spain (-20%) and India (-15%) have contracted sharply.  China has, moreover, not employed massive government money printing, or direct subsidies to the unemployed, as Europe and the US have done.  China’s export share has grown, with a strong balance of payments, and a strengthening Renminbi.  Since Trump was elected in 2016, China’s trade surplus with the USA has grown 25%.

This means that China’s economy will reach almost $12 Trillion this year, or 70% of the USA, and is likely to reach parity by 2028.  But this optimistic scenario may depend on how successfully China navigates a world trade slowdown, a large domestic debt rescheduling, and an increased dependence on the Chinese consumer.

The major theme of 2020 has been the “Return of the Stock Picker,” instead of ETFs and index funds, which have prevailed since 2009.  With a month to go until the US Presidential Election, investors are busy hedging their bets.  The US dollar remains weak, with corresponding strength in precious metals.  Asian markets are out-performing.  Their economies are in healthier condition than Europe or the USA.  Led by China, they are coming out of the virus lockdown, and resuming normal business.  In our regional Asian strategy, which has gained 22% year-to-date, we have our major overweight in China, Taiwan, and Korea (72% of the Fund) with a focus on technology and healthcare.

This month, we must focus on Japan, in which Prime Minister Abe stepped down after nearly a decade in the job, to be succeeded by Mr. Suga.  The challenge for Japan’s leaders remains the same — a declining population, and a rising China.  Japan’s population is shrinking rapidly, from 127 million in 2014, to less than 100 million by 2050 (or 25% in 30 years).  Deflation has gripped the Japanese economy since 1990, though the Bank of Japan has cut rates below zero, and purchased most of the JGBs (Japanese Government Bonds), or $760 bn. p.a., so that Bank of Japan now owns nearly 50% of the country’s outstanding debt.  The Central Bank has also bought a large amount of Japanese shares, so that its balance sheet is now larger than Japan’s GDP.  Is this the future of Western economies?  Could the Bank of Japan, or Government of Japan, simply cancel half their outstanding debt and, thus, recover the stimulus of economic growth from under a mountain of debt (250% of GDP).  In the meantime, it is not only Warren Buffett who has spotted “value” in Japan’s old established “Zaibatsu” or trading companies, such as Mitsui, Mitsubishi, and Sumitomo.  Japan’s dividend payouts are rising, as are share buy backs:  there is a real bargain for investors in this forgotten market, and, indeed, in the Yen.

In 2021, the world will benefit far less than in 2009 from China’s recovery, as the country turns inward for the first time since the 1970s.  Another familiar echo of that decade may be the return of inflation.  Despite the dramatic pivot by Jerome Powell at Jackson Hole in August, towards lower rates for longer (and 2.5% inflation), the market may look further than the Central Bank (The bank of England is now openly contemplating negative interest rates on gilts).  Volatility will become more pronounced in all asset classes in the face of this uncertainty about the dollar, and about interest rates.

The Supreme Court has suddenly been thrust into this highly charged election, with the death of the much respected Ruth Bader Ginsburg.  At this stage, it is impossible to predict, first, whether the Republicans can force through a new Superior Court Justice in the next 2 months, or what effect this will have on what is expected to be a close, and perhaps, contested US Presidential election.

Source: IMF World Economic Outlook, June 2020 Update

We remain positive on the outlook for Asia in 2021, when we see a strong recovery from the virus-dominated economy of 2020.

*(Review of David Yergin’s new book, The New Map)

Hong Kong

1 October 2020

The Gold Renminbi

When we wrote last month about the decline in the US dollar, the obvious question was: What is the alternative: Euro, Yen, Swiss Franc, Pound? As China is now the second largest economy, and the No. 1 global trading power, it is worth considering if an alternative exists in the Yuan, or “Renminbi” (people’s money). The Chinese authorities clearly see the risk of continuing to depend on the US dollar to pay for all their imports, especially oil: also, as a medium of exchange, or store of value, for their massive reserves of US$3 Trillion (the largest in the world). It is estimated that currently 60% is held in US dollars and nearly 4% in gold, with the balance in Euros, Yen, etc.

China has been actively buying gold since 2015, building their gold reserves from as low as 1% to around 3.4% today of total forex reserves today. This is much lower than developed countries like the US at over 8,133 tonnes, 80% of its reserves, and even Germany at 3,363 tonnes, 75% of its reserves. China currently holds 1950 tonnes in gold reserves officially, an increase of over 90% since 2015. Unofficially, analysts have estimated that China holds closer to 5,000 tonnes.

The top 10 countries hold close to 50% of global official gold reserves, while the IMF itself holds 2,814 tonnes as well. But China has already begun, 2 or 3 years ago, to offer Saudi Arabia and other major oil producers (Russia, Iran, etc.), payment for its oil shipments, in “Petro Yuan” or Renminbi backed by gold, with an implicit guarantee against devaluation, instead of US dollars. Given the centuries-old preference among both Arab traders and Chinese businessmen for the precious metal, instead of “Fiat” paper money, this makes sense for both sides. In addition, the attraction for Arab investors and other international institutions to buy Chinese RMB bonds at 2.9% on 10-year paper, instead of 0.6% in US dollar 10-year Treasuries, is evident. (It is also interesting to note the historical perspective, that while the Western world effectively abandoned its gold standard in 1931, the Chinese continued on its silver standard for some years longer.)

With the real risk that the Trump Administration, or perhaps its Democrat successor, could further “weaponize the dollar” by imposing more severe sanctions (as they have already done on top Hong Kong and Chinese officials), and effectively shutting China out of the US dollar financing system, it makes sense for China to explore alternatives – a gold-backed RMB, or even a digital RMB, which (backed by China’s massive reserve) could overtake Bitcoin (if supply was similarly limited).

But readers may question why we are so interested in gold, and its role in the global monetary system. Given that Asia – headed by China and Japan, but including South Korea and Taiwan – runs a large trade and current account surplus with the West (and, indeed, with emerging nations), the question of whether the US Dollar continues to dominate the global financial system becomes even more pressing. If China can succeed in making the RMB internationally acceptable by having a link to gold, it would dominate the Asian financial system (and Hong Kong may become the leading forex centre).

The long cycle of disinflation, which has been in place since 1982, has seen interest rates fall from 15% to nearly zero. This has now finished. The bond bull market is over. The “Ice Age” of deflation is giving way to “The Great Melt” of massive monetary stimulus, and frenzied fiscal pump-priming, in an attempt to paper over the current pandemic-induced slump. Inflation of 4% by the end of 2021 is now anticipated by many experts.

With that monetary background, we may be in for extreme volatility in currencies and markets. If the gold renminbi comes to pass (or, indeed a gold ruble), then the demand for gold will soar (and, in fact, both Russia and China have been steadily purchasing gold for their central bank reserves now for several years); and demand for the dollar will slump. The era of US dollar domination of the world’s financial system may end by 2025/2030.

In addition, it is worth noting that China has become the first major country to launch a “Digital Yuan” or Chinese cryptocurrency, backed by The Peoples’ Bank of China, and likely to replace much of the existing digital on-line payment systems of WeChat (Tencent) and AliPay (Alibaba), which account for RMB 2 Trillion (US$300 Billion) in payments currently.

Reviewing 2020 investment performance so far, it is striking that China is one of the few major markets showing a gain of 11% (in Shenzhen, it is 32%), which has helped our Bamboo Asia Fund, LP to an estimated 20% gain year-to-date. (For clarification, this is the fund managed by Robert Lloyd George and Lloyd George Management (HK) Limited; Management of Quaero Capital Funds (Lux) – Bamboo has been moved back, last month, to Quaero Capital LLP to manage.) Only the NASDAQ, with a 26% rise, powered by Apple, Microsoft, Facebook, Google, and Tesla, has outperformed. Both South Korea (+6%) and Taiwan (+5.4%) show positive trends, whereas South East Asia (Singapore -21%, Thailand -16%, Indonesia -16%) has lagged behind badly. To some extent, these numbers reflect the economic realities – that the ASEAN economies are still in lockdown, deprived of tourist income and business investment – but it is also true to say that China, South Korea, and Taiwan, as well as NASDAQ, reflect the weight of technology in their indices. It is hard to overemphasize the rapid acceleration of technological trends such as online purchases (and now cryptocurrency payment systems).

The commodity group has also seen some wide disparities. While oil has seen a 30% fall, due to wide cutbacks in commercial aviation, shipping and transport, gold is up 28% and silver an astonishing 50%. We would also highlight the recent strength of lumber (+100% this year), and, particularly, iron ore (+45%), whereas copper and aluminum are relatively flat. The economic prospects for 2021 are still very uncertain. And we do not believe it is helpful to make forecasts for the Asian economies since so much now depends on the course of the virus – will it continue for another 6 months, one year, or longer? Will we have a successful vaccine by the beginning of 2021? Who will prevail in the presidential election of November 3rd? Our hope is for a calming down of US/China trade tensions next year, and a return to normalcy after an unusual and feverish year in 2020.

One of the key messages we are getting out of China these days is “KEEP IT AT HOME” – the tourist dollars ($70 billion last year), the students studying in the US, UK, and Australia, and the manufacturing (especially technology). Xi Jin Ping calls this “Dual Circulation,” (it is not clear why); but it means China, in the next 3 years, becomes much more self-sufficient, and turns inward instead of looking out to the world. It also means a stronger RMB, (China’s money supply has grown much less than Europe or US in 2020), and perhaps a shift to a more convertible, global reserve currency.

Hong Kong

1 September 2020

The US Dollar Weakens

At the beginning of the virus pandemic, in March, we commented on “The Virtual World” in terms of on-line work, on-line study, even on-line dating. The last 5 months of the virus lockdown have (like a war) accelerated both economic and social trends. This is clearly mirrored in the outperformance of the “FANGS” (plus Tesla) in the US market, and of the “BATS” (Baidu, Alibaba, Tencent, plus others in healthcare) in the Chinese market.

There will be a lot of “creative destruction” in old line businesses – for instance the lamentable bankruptcy of Brooks Brothers in the retail space. In fact, physical retail has shrunk dramatically everywhere. Marks and Spencer, among other UK retail chains, has laid off 30% of their staff. In Hong Kong, demand for office space has sharply contracted.

So what does this mean for employment? Nearly 30 million Americans were made unemployed in March and April. Now it is estimated that 17 million are still unemployed (as at July 31st), especially workers in hotels and restaurants, airlines, etc., still on furlough; but many more around the world will lose their jobs. They will have to re-train, with new skills, in an on-line world.

What of the millions of students coming out of college in these next few years? The job opportunities have dramatically diminished. Robots will also increasingly perform the manufacturing work previously executed in Asia. The demand for labour contracts, but salaries should increase. The share of capital and labour in corporate profits will shift in favour of the employees.

It is especially the case in the 18 to 34-year-old bracket that layoffs have been very severe. This will affect consumer and investor behaviour for some time to come. Savings rates are climbing again.

What does all this mean for investors? The US dollar is weakening for several reasons: a growing perception that Trump will lose to Biden on November 4th, that the US has handled the virus badly, and that the government finances and deficit have rapidly weakened. The Euro is heading for 1.20 – there is a strong momentum for commodities. Gold has made a new all-time-high at $1930 an ounce, and silver is up 80% this year.

Gold’s new all-time high has a symbolic importance in that it reflects falling confidence in the US dollar and, hence all “fiat” currencies. It is calculated that, based on the expansion of the Fed’s balance sheet to $7 Trillion plus, gold is likely to exceed $5,000/ounce over the next 3 years.

China/US relations are getting worse, but they still need each other. It is actually quite difficult to transfer manufacturing currently done in China, “back home” – though Japan is paying their companies to do just that. We estimate that 80% of US and European companies will remain committed to China.

The Hong Kong situation also deserves some commentary. Whatever our view of political liberalism and human rights, the facts on the ground are these. The majority of Hong Kong people want to get back to work, and China is the source of much employment, through tourism and investment. With a small “second wave” appearing, the Hong Kong economy is still struggling to recover, with the border closed and strict quarantine in place.

The Hong Kong Exchange shares are, however, doing very well, with this week’s announcement of Ant Financial, the Alibaba payments subsidiary, coming to market: and an estimated $1 Trillion in market capitalization is available from Chinese companies relisting their shares in Hong Kong, from New York.

In Southeast Asia, the situation is like Hong Kong. Everyone’s waiting for China. And, unfortunately, until there is a successful vaccine (Oxford University promises in October), nobody is yet willing to travel. Our bet on a swift recovery in Singapore has not yet worked out. Large domestic economies, like Indonesia, are doing better.

India, despite a growing number of virus cases, has had a good month in the market. The $16 Bn. investment in Reliance JIO, by Facebook, Google, Silver Lake, and others, is powerful evidence that it is India, not China, which could be the Emerging Market of the Next Decade, with on-line services in the spotlight. The World Bank estimates online sales, as a percentage of total retail sales, were only 2% in India, versus over 40% for China, and around 14% globally.

Is China really growing at 3%? That is a leading question. With GNP estimates for 2020 coming in from the USA (-9.5% in 2Q), Europe (-10%), and Singapore (-10% in 2Q), it is hard to see how China’s economy (without a major fiscal stimulus), can grow rapidly with much foreign trade and investment. We focus on freight, electricity consumption and retail sales, which have not recovered strongly since the re-opening. There are also small “second wave” outbreaks of the virus in Xinjiang and Dalian. Thus, we have also focused on the healthcare and technology sectors, which continue to do well. TSMC was up 10% in a day, on an anticipated shortage of integrated circuits.

The disconnect between the real economy and the capital markets continues to surprise observers. But the estimated $10 Trillion of liquidity added in the past 3 months by Central Banks to the global financial system, and the growing spread of zero real interest rates, means that we continue to be positive on investing in Asia.

Hong Kong

3 August 2020

Will Inflation Return? And, The Second Wave

At present, in the midst of the Covid Pandemic, nobody expects rising prices despite the enormous stimulus programs and Central Bank money printing in the US, Europe, Japan, and China.  Yet we see pent-up demand, after the 3-month lockdown in retail sales, in auto sales and in housing sales.  Money is freely available at a very low cost.

As Walter Bagehot famously remarked in 1860, “John Bull can stand a great deal, but he cannot stand a 2 percent interest rate,” meaning that, when rates reached what was then a rock-bottom level for the UK, undue speculation revived in Turkish loans, Egyptian bonds, and other developing nations offering yields of 10% because of their poor quality credit history.

Today, speculation is reviving among day traders (the recent case of the bankrupt Hertz is one instance).  In Hong Kong, plenty of zombie companies are traded at ridiculous share prices.  Property, commodities, bitcoin, and unproven medical remedies for the virus, have all been punted.  As we highlighted last month, the divergent realities of the economy and the stock market have been striking.  Since the end of March, government money-printing is the main stimulus behind the market’s exuberance (though to be fair, the unexpected revival in employment and retail spending has somewhat vindicated the optimism of investors).

Russell Napier argues that the government guarantee, in Europe and the US, for bank loans will provide a trigger to finance consumption, and will produce 4% inflation by next year, though this is not yet implied by option or bond prices.  Chris Wood (“Greed and Fear”) also expects that the Fed’s move to buy more junk bonds, and to do “yield curve control” may raise the potential for inflation readings to surprise on the upside.  The Bank of England has implicitly underwritten the British government’s spending plans, undermining the Central Bank’s role to “lend, not spend.”  USM1 and M2 have risen 33.5% and 23.1% year-on-year, the fastest growth since data begun 60 years ago.

As for the second wave now occurring in Florida, Texas, Germany, and even Beijing (only about 300 new cases), there is an implicit commitment in the US and Europe not to shut down the economy again.  We will, therefore, see numbers climbing again (now it is nearly 11 million infections worldwide and over half a million deaths); but, hopefully, the global economy will gradually revive and get back to its previous growth trajectory by the 4th quarter.

China was the “First In, First Out” major economy, and signs of a strong recovery in retail, auto, and housing sales are emerging.  In particular, e-commerce is booming with the leaders, (Alibaba,, Suning, VIP shop), seeing sales grow between 20% and 50%.  China’s GDP will be in positive territory (+2% this year) after a sharp dip in the January-April quarter, though trade numbers may continue to be weak. 

We want to focus on 2 important economies — India, our favourite emerging market, and Vietnam, the top-performing frontier market.  It is worth emphasizing that Frontier Markets total AUM has shrunk in the 6 years since 2014 from $50 bn to $5 bn.  Emerging Markets have seen a $40 bn outflow this year alone.  So the asset class is completely out of favour after nearly 10 years of underperformance.

Total Return Comparison S&P 500 Index vs. MSCI Global Emerging Market Index

Source: Bloomberg

But India (which has seen a $3bn inflow in the last month) has the best fundamentals compared to China, Brazil, Russia, Indonesia, and South Africa.  It is a large domestic consumer economy, with a young population of approximately 1.35 bn.  It has a democratic and pro-capitalist government under Mr. Modi, dedicated to streamlining bureaucracy and cleaning up corruption.  It has a closer relationship today with the US and Europe, and Foreign Direct Investment is growing rapidly, doubling from USD 35bn in 2011 to USD 73bn in 2020.  Investment was strong in manufacturing, communication and financial services – the top three industry recipients.  Notable megadeals included the acquisition of Flipkart, by Walmart (United States) and more recently an investment of USD 5.7bn from Facebook into Reliance Jio platforms.  The Rupee is stable, and the fiscal and trade deficit are reasonably under control.  The Pharmaceutical industry (23 listed companies) is making rapid progress and partnering with US and European industry leaders, as many essential products will be “reshored” from China.  We see considerable potential in the growth of the e-commerce market in India, which is still only 3% of total sales (40% in China).  Reliance JIO is the leader in this sector.  The Indian financial sector continues to lead the market (30% of market cap) led by industry leaders such as HDFC and Kotak Mahindra.  Finally, our core conviction remains that the Indian consumer will boost spending as incomes grow – Hindustan Unilever, Nestle, Britannia, being among our core conviction positions.

Vietnam, meanwhile, has come out of the virus better than any other ASEAN nation — only 300 cases.  The economy will grow 5% in 2020 – almost the best in the world.  Foreign multinationals – Samsung, Apple, Nintendo, and Google – are all moving manufacturing to Vietnam.  Factory construction is booming.  A very young population of 100 million has a thirst for education, for self-improvement, for better opportunities.  The government is pro-business, and is fast tracking $10 bn worth of infrastructure investment including a North South Highway, 2 metro lines, and a new Ho Chi Min City (Saigon) airport.

Thailand is also coming out strongly from the virus, despite the sharp fall in tourism.  Medical tourism will benefit as evidence of the high quality of their hospitals is underlined.  Most of South East Asia (Indonesia, Philippines, Malaysia, Singapore, and Vietnam) also depends on tourism, which accounts for 10% of Global GDP, and millions of service sector jobs.  So this will depend on when tourists from Europe and China overcome their fears of infection to venture overseas again.

Meanwhile, the US dollar is showing definite signs of peaking, as the prospect of a Trump defeat in November, a second wave in the south, and a weakening geopolitical position, impact investor sentiment.  This could eventually result in 2 or 3 years in a more severe currency crisis – and a surge in the gold price – in the aftermath of the pandemic.

Meanwhile, our advice to investors is to focus on Asia, the best region in the world for economic growth and political stability, which will outpace all other regions of Emerging Markets in the coming recovery.

Hong Kong

6 July 2020

“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) 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