China was all the rage for a short while, but despite chugging along at a premium growth rate to the rest of the world, investors have pretty much focussed on other markets – the U.S. of course but Japan as well of late.
Over decades I’ve come to believe that a pattern has emerged which would imply now is likely an ideal time to consider investing in China but also those economies (also out-of-favour) and sectors hugely dependent upon China.
What’s the problem with China? This quote summarizes things:
“Over the weekend we saw a bunch of disappointing data out of China that pointed to sluggish economic growth. Industrial production slowed to 9.2% in May, missing expectations for a 9.4% rise. Fixed asset investment was up 19.9%, retail sales were up 12.9%, in line with expectations. Meanwhile inflation cooled, with consumer prices rising 2.1% and producer prices down 2.9%.”
Positive surprises generally move markets, just as the quick recovery in the US corporate profitability coming out of the financial crisis caught strategists off guard. I’ve suggested in the recent past that: Global resources boom imminent! I expect there to be signs by the third quarter of this year that will get things moving.
As you can see by the following graph comparing the Shanghai Composite Index and the S&P 500, the Chinese market requires a strong U.S. economy and market first – then rising exports act like a turbo engaging in an engine, but with a substantial lag.
In the coming months, the US economy will begin to compete with China for raw materials and other commodities, just about the same time as Chinese exports to North America and perhaps Europe will pickup.
Once markets ‘adjust’ to the inevitable easing off of aggressive monetary stimulus, growth will resume at a more steadied rate for most developed economies, with the exception of China’s economy – which should accelerate rapidly.
Investment dollars cannot help but to move toward China. The inflation rate both here and there will be running at 2%, but China’s industrial production in this slump is growing nearly 4X faster than the US. And let’s face it, hedge funds and institutional investors worldwide own as much of the US stock market as they can.
Countries (Canada & Australia) and industry sectors (Mining, Energy, Steel & Fertilizer etc.) that are sensitive to global growth are oversold and poised to enjoy the same sort of slingshot effect that the Chinese stock market will experience – as dollars shun bonds and dividends in favour of an opportunity to get some upside momentum.
As I recommended in my book Resources Rock (published 2004):
“The ideal time for buying (resource) shares is before all of the above factors are in place – before commodity prices are strong; before revenues are rising steadily; before the company makes a profit; and before the economy is back on its feet.”
Love your commentaries Mal. Keep them coming.
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