A Perfect Storm (revisited)

At the end of April 2012 I wrote an article entitled “The Perfect Storm”. In this article I envisaged the catastrophe lying in wait for the Investment World that would be created by the following three events. Firstly, the slowing down of the Chinese manufacturing miracle would create internal unrest and bloodshed sufficient to unseat many Asean countries` economies. Secondly, the Euro as a currency and Euroland as a market would cease to exist. Finally, that the safety and security of American government Gilts and Bonds would be eroded. Well, a year down the road very little if any of this has taken place. During this period we have seen the world stock markets rise to approach, and in some cases breach, their all time highs and then fall back close to where they started.” Volatility” is still the by-word.

China has seen its rate of manufacturing growth almost halve to an enviable (for the rest of the world) seven percent. During this time the Chinese government has contained any unrest by allowing wage rates to rise and by investing internally into the country`s infrastructure. The Chinese middle classes are fast forming the largest population of tourists as they catch up with travelling the world. Provided that the Chinese government is able to continue in this approach and let internal consumption continue to rise and create the majority of the demand for their manufacturing base, then China could very well not be a problem for the investing world, but in fact a great opportunity.

Today the Euro and Euroland still exist in their original form, but what the next few years will bring is still very much a case of watch this space. There are still huge differences in the strength and viability of the various member state economies. The questions of austerity for some and not for others and high unemployment for some and not for others are open wounds that continue to fester. The politicians for all their bluster continue to kick this can further down the road for somebody else to eventually resolve. The UK politicians are facing demands from the population to hold a referendum as to whether the UK should leave the E.U. Should this referendum take place and the vote be carried then many other E.U. countries may follow suit. That would spell the end of the E.U. as a future world force.

The safety and security of American government gilts and bonds is still a meaningful question, but one that no longer would seem to be an imminent danger. In fact quite the reverse may be the situation. The American economy would now seem to be on a rising curve. Increasing manufacturing at home, falling unemployment, increasing new house starts and the godsend of Shale oil and gas is revolutionising the economy for the better. It has now reached the point that Q.E. will be curtailed in the near future. There is still however the matter of enormous existing debts to be serviced but inflation and the removal of overseas purchases of oil and gas will all contribute to the reduction of these debts. This being the case, then the American dollar strengthens and the country`s bonds and gilts are secure. Now that is quite a turnaround from a year ago.

What will the next year bring for the investing world to consider and act upon? Perhaps the developing world`s emerging middle classes will create such a demand for gold jewellery that the price of mining stocks will rise due to demand without gold having to be considered as a safety valve against the dollar.

Maybe the U.K. will become a rising market if it continues to increase employment in the Private sector whilst reducing the amount of people employed by the State. Perhaps the UK Austerity measures can be made to stick and attention would be focused on the vast amounts of wealth that is wasted on unmonitored projects and institutions. This may in turn revive the desire to be self reliant and less dependent on State handouts. All of this could lead to a rise in the UK stock market and a place for your investments. Now wouldn’t that be nice!

Investing in China

I feel quite sad about the flack that Anthony Bolton is receiving as a result of his exit from the control of Fidelity China Special Situation Investment Trust. Certainly the fund has gone backwards from its launch, but then during this period so has every other Chinese fund – in the last few years this has been a failing sector. The Shanghai Stock Exchange Composite Index is currently back down at levels not seen since the financial crisis of 2008.

Surely this makes the case for being a Momentum Investor and only holding funds in the best performing sectors. Even the best of managers – and Anthony Bolton is one of the best – cannot make progress in a falling sector.

How long will China remain a difficult sector in which to make investment progress, and will it ever return to the heady days of pre 2008 when it was an investment gold mine? Perhaps China`s economy and stock markets will copy the example of Japan`s after the end of the Second World War. In this case there was enormous growth as money and technology were poured into the economy, but over the years this growth slowed down from the mid teens to a more manageable five or six per cent per year as the economy matured. It was only then that the Japanese stock market really took off and we saw the Nikkei reach the dizzy heights of thirty thousand plus. Of course, as we all are aware, things went wrong after that as property and technology bubbles formed and burst and this, combined with external manufacturing competition, took the Nikkei back down to below nine thousand.

The question is whether the Chinese economy has gone through a similar first stage of rapid growth and is now settling down to a more sustainable level of growth matching demand with home consumption and export sales? If this is true, will we also see a similar dramatic surge in the Chinese stock markets as occurred with the Nikkei?

Only time will tell if this becomes the case and Anthony Bolton will eventually be proved right.

Investing in Pakistan?

This week the Chinese Premier Li Kequiang met with the  President Asif Ali Zardari and the Prime Minister elect Nawaz Sharif, the leader of the Pakistan Muslim League (PML). The purpose of the meeting was to promote and revitalise the economies of both Western China and Pakistan. Their intention is to try to create an economic corridor between the two countries.

It appears as if the Chinese Premier is totally intent on spreading China`s markets away from their dependence on the old unreliable developed world markets. Since becoming Premier he has made visits to most of the Asean countries, and also to Japan and to Indonesia. China has also increased its investments into Africa and into South America. Put all of this together with their drive to increase internal consumption at home and you can see that in not too many years time China will have stabilised its manufacturing to meet demand. China will yet again be a great place to invest.

Pakistan is a nuclear armed country with a population of over 150 million people living in what many people in the world regard as a failing State. Pakistan is ranked 146th out of 186 countries in the United Nations human development index. This country faces a daunting array of problems which include Islamic unrest, a failing currency, a static economy and failing power supplies to name but a few.

At the recent elections Nawaz Sharif was given a sizeable mandate to try to rectify the country`s situation. Sharif is the co-owner of the massive two billion dollar conglomerate the Ittefaq group which is involved in steel, paper, sugar, textiles and engineering. He is a conservative, pro-business devout Muslim and this will be his third time in office. His first problem will be to persuade the World Bank and the IMF to make future loans to Pakistan in order that it might meet its existing foreign debt obligations. Sharif`s slogan is a “Strong economy will make a Strong Pakistan”. He is seen as a flag bearer for private industry and entrepreneurship.

Trade between China and Pakistan is already on the rise and at last week`s meeting a two year target was set to achieve a trade turnover between the two countries of 14 billion dollars. The Chinese are already involved in the building of new power stations and road and rail projects. These are all designed to increase the ability of the young low wage earning population to become gainfully employed and improve the GDP of Pakistan as they become meaningful producers and consumers.

The Karachi stock exchange has around 500 registered companies on its books. That is tiny in comparison with its neighbour India`s stock market which has ten times this amount. However it is worth noting that on the announcement of Naway Sharif`s election the Karachi stock exchange rose to its all time high of 20,300. This man would appear to have the knowledge and intention to drag Pakistan into the 21st century. Provided he can avoid execution by terrorists and he continues to be assisted by his Chinese friends then perhaps he just might manage this task. So perhaps we should put Pakistan on the watch list for investment alongside the Asean economies and Indonesia.