Booster Client Update - How To Train Your Dragon
Consider the multitude of things around you at this very moment that were probably made in China. Your phone, chair, mug, shoes, or the clothes on your back? Even potentially that new car you are looking at!
Much like New Zealand prior to 1984, China had a closed economy. Over the last few decades however, government reform has helped transform it into both the world’s largest factory and the world’s second largest economy. Today China adds more than 25% of value to global manufacturing supply chains and accounts for 50% of global demand for steel, nickel, copper, aluminium and cement.
The Great Wall (Street) of China
Since the start of the year China’s stock market has weakened and is now at the same level it was two years ago. In contrast, global developed markets have risen 40%. Although this recent performance has largely been driven by concerns over trade with the United States, there has also been debate around domestic debt, as Chinese corporations have borrowed and spent over US$500 billion on foreign acquisitions in the last 5 years.
While GDP growth rates are still almost double that of developed economies (6% vs 3%), these have pulled back from the double digits witnessed in the previous decade. Once again, however, a transformational shift is underway.
China’s Plan for its Future
With growth still forecast at a faster pace than “developed” economies, and a stable government, the plan is to transition away from a manufacturing economy, to a western style one led by consumption. Over 40% of the population has already moved from rural areas to cities over the last four decades. This represents 550 million people! With the trend set to continue, there will be one billion urban residents in the country by 2030. This tailwind for economic growth supports baffling statistics like a new skyscraper being built every 5 days, 27% of global graduates being Chinese by 2030, and over 100 of the world’s largest companies now being Chinese; in the year 2000 there were only four!
Booster portfolios continue to have some exposure to China and its long-term growth through a range of investments, like the Vanguard Emerging Markets Fund, individual companies such as Tencent (China’s social networking giant), and indirectly through companies we hold that sell products to China, like Schindler (Elevators and Escalators), Ansell (Latex Surgical and Safety Gloves) and A2 Milk, who sell, not surprisingly, milk- based products like infant formula. While the road will be bumpy at times, these provide some access to the opportunities from the growing Chinese dragon.
Market & portfolio update – July
- Portfolio returns were solid again in July, led by global share markets rising 3%. While NZ Shares were flat in comparison, this follows our local market gaining 17% over the past year, having been in a “sweet spot” of offering higher dividend yields than the rest of the world along with reasonable economic growth.
- The global economy grew at a solid 4% in the second quarter. Companies also continued to report positive earnings growth, despite the political posturing around tariffs and trade. Whilst we continue to keep a close eye on how far these might go, we remain confident that behind the headlines, the wider momentum in business earnings and economic confidence continues to underpin a positive current outlook.
Investment portfolios had a rather subdued month in September, capping off a very strong quarter driven by solid returns during the months of July and August. In fact, the US share market produced its best local currency quarterly return since 2013, with the S&P 500 up 7.2% for the September quarter.