For immediate release: 18 August 2015
Chinese Whispers
Rowan Dartington Signature’s Guy Stephens looks at key worries and opportunities for investors
with regard to the Chinese economy and low commodity prices
The managed devaluation of the Chinese Yuan last week has been the biggest story to occupy the
markets since the Greek hiatus and is, arguably, now the new worry for us to contend with.
We are all aware of the challenges Chinese domestic investors have faced in the last few months as
their equity market has gyrated around and the central authorities have attempted to control the
volatility. Devaluing the currency is supportive of that goal and sure enough the Chinese market did
benefit. However, the bigger external worry is what it says about the state of the Chinese economy
as devaluing is a significant action to take and is likely to be driven by a need to stabilise the equity
market.
The official Chinese GDP numbers always come in as forecast (currently 7%), they also are always
released within two weeks of the quarter end and are never subject to revision. The Chinese
statisticians are clearly considerably more gifted than most as they manage to get it right every time,
in a fraction of the time it takes elsewhere, in an economy that is bigger than all but the US and
significantly more difficult to measure due to technological inferiority. In the democratic economies
elsewhere, we have three attempts at measuring GDP and it takes a whole quarter before the final
number is signed off. Even then, as occurred in the credit crunch, we sometimes get humble-pie
announcements several years later, hence where further adjustments are made, in this case
revealing that the true extent of the hit to UK GDP from the bursting of the credit bubble was not as
severe as first thought.
Whilst the opaqueness of the Chinese GDP numbers is well known, it doesn’t help when the
currency is devalued. Indeed, this is surely a step that no Government would choose to make when
they are trying to rebalance the economy in favour of domestic consumption as it makes the
purchasing power of the Chinese consumer weaker. It also sends a message to the west that all may
not be well under the bonnet despite all the polishing that goes on. This is why commodities took a
further lurch down and other exporting nations such as Brazil, India and Asia-Pacific nations saw
their stock markets affected as Chinese exports have just become around 5% cheaper to the
developed economies.
The UK equity market is influenced in quite a significant way due to the weighting of energy and
commodity stocks. Year to date, the FTSE 350 Industrial Metals and FTSE 350 Mining sectors are
both down by -37.6% and -21 9% respectively whilst the FTSE 350 Household Goods, FTSE 350
Construction & Materials and FTSE 350 Real Estate sectors are up by 28.3%, 27.5% and 26%
respectively, measured on a total return basis in Sterling. This makes sense as the former are
directly connected to the China story, the shrinking oil price and the strong US Dollar, whilst the
latter are a function of consumer spending, boosted by lower fuel prices, a booming housing market
and a buoyant commercial property market.
In a broader context, the FTSE 350 as a whole, is up 4% year to date whereas the FTSE 100 is up by
just 2.6%. The greater weighting of mining and oil businesses in the FTSE 100 and the greater
weighting of consumer and property businesses in the FTSE 250 is influencing these trends. So far,
2015 has been a year for the active managers who have been able to play these sectorial disparities
to the advantage of their investors. In addition, this has suited our collective fund selections, which
are always overweight to the FTSE 250 where the excess returns lie, meaning that there have been
plenty of attractive returns to be had, despite the perception that the equity market has gone
nowhere this year. In fact, all of our collective models have beaten the FTSE 100 so far this year,
even the most defensive, showing just how poor the FTSE 100 has been as an investment universe.
There is a similar story to be told in terms of performance in the US and indeed, the rest of the
world. Year to date, the S&P 500, in Sterling terms, has risen by 2.4% and the rest or the world,
excluding the UK has risen by 2.6%, all very pedestrian. However, the FTSE 250 index has risen by
11.4% and the Small Caps are up by 9.5%, both of which are dominated by domestic businesses.
Similarly, in overseas markets, domestic businesses are doing considerably better than their larger,
more global, brethren. This is probably not surprising as the key worries this year are of global
proportions where the linkage between issues such as Greece/EU and China/Global GDP are clear
for all to see.
As for China, cheaper exports means less inflation in the west and therefore a reduced possibility
that interest rates will rise, which is a good thing. Commodity prices and oil prices look like they will
be staying very subdued until well into next year which is always positive in terms of business
costs. The consumer is experiencing some wage growth as well as lower fuel costs along with a
buoyant property market at rock bottom interest rates, which are unlikely to rise by much even
when interest rates start moving up. So the domestic sectors look set fair.
It used to be said that when America sneezes the rest of the world catches a cold. With China
adjusting its currency, for whatever reason, all eyes will be on future economic data releases to see
whether there is a dose of Asian Flu ahead.