The China factor

Investors need to recalibrate their approach to China as new opportunities evolve. This is part three of a Super Review asset allocation roundtable.

Mike Taylor, managing editor, Super Review: China is pretty significant for Australia and, as was noted earlier, we're recalibrating our economy because the resources boom is tailing out. So I'm just wondering, how does China play into outlooks? I'll start with Chris on that. Pretty fundamental for Australia, maybe not global.

Chris Diaz, head of global rates and portfolio manager, Janus Capital: Yeah, certainly as a fixed income manager it's really an uninvestable market. So I view China, certainly its importance as the world's second largest economy and you know, having an export led strategy for growth, you could argue the marginal price setter for commodity prices. So they've had a pretty tough combination of fiscal contraction and this debt overhang and frankly a currency that has not depreciated the way that competitors in the region have and have thus put some real pressure on that export led strategy.

It seems to me that returning to the days of double digit growth pre-financial crisis are likely over, to the extent that they impact the price of commodities. I think that that pressure will remain downward and then when we look at the most high profile commodity of oil, which I think certainly would impact the price of other commodities, our analysis suggests that with the Saudis pumping as much oil into the market as they ever have, the notion that this oil price was going to eliminate many of the American producers, which has not happened, and now a deal with Iran that'll likely bring even additional supply to the market, that our outlook for oil remains quite negative as well. So that in an environment where global growth is sub par and has been pointed out, is continually being marked down, so it seems to us that commodity prices in that environment are likely to remain quite muted.

Greg Michel, senior consultant, JANA: China has been highly successful to date in managing their economic expansion. Growth has slowed recently and this appears to be largely due to the economy beginning to evolve and transition from a predominantly manufacturing base to a manufacturing/service economy. This has implications on their demand for commodities and for the commodities markets as we have seen recently.  

In terms of the growth outlook for China, it is inevitable that the rate of growth in the Chinese economy has to decline as the economy expands and matures and diversifies its economic base. Most economists are currently predicting Chinese growth in low six per cent range.  This is certainly not a bad outcome on developed market growth standards. The good news is that the Chinese economy is expected to continue to expand and will continue to demand various commodities on a steadily expanding economic base. We've seen a significant sell off in commodities across the board. I'm not saying it's fully priced, but you'd have to wonder.

So look, there's uncertainties there, there's unknowns. The economy seems to be initially suffering from growth transition pains, and that's having repercussions, particularly for Australia with its heavy reliance on commodity exports. More broadly, if you look around the globe, most of the commodity exporting economies are still cutting rates. We saw Canada cut rates recently while in Australia, while the RBA remains on hold, the market nonetheless continues to price in the scope for another rate cut as well.

Justine O'Connell, consultant, Frontier Investment Advisers: Yeah, I mean our view is somewhat similar in that the Chinese economy growing maybe not at seven per cent but at six per cent is still meaningful growth and that there's a number of issues that they need to work through. Obviously, as was just discussed, the equity market issues in terms of seeing how that then flows through to the economy depending on who's impacted from that. But the view is that policy-makers do have a number of levers to pull in that economy and that they have the ability and will to do that, and have managed a number of different issues. We are just watching to see how that kind of plays out over the next few months. But the general thinking is that it won't have as big an impact in terms of that sort of negative 30 per cent fall on equity markets as you might seen in other markets where it's sort of a broader based investor.

Obviously there's the impact on Australia and just seeing how that plays out in terms of the lower Australian dollar and we've got commodity pricing issues in terms of iron ore and a number of different key commodity prices there. So just seeing how that sort of plays out in terms of the Australian economy. But as I said earlier, we're relatively positive about Australia perhaps in is ability to transition the economy, but there's a number of uncertainties in how that is managed over the next period.

Stephen van Eyk, investment consultant: If I can look at it from a longer term perspective, China was always going to slow down to a five per cent growth rate. I remember when they were [at] 15 per cent and started to slow and people said, "They'll become consumers and that'll keep the growth rate up", if you think back to university and Maslow's hierarchy of wants, all developing economies go through the same stages. So they were in the export stage and then that dropped off when the rest of the world growth slowed. They were never going to start spending the money, they were going to start saving like hell because they didn't have the infrastructure around them. They didn't have health, they didn't have superannuation and all that. And so it became a savings economy.

Obviously they also over-invested in China and that's where it hit Australia hard because if you're not going ahead and you haven't quite started to get the spending thing going, you don't really need all those buildings they put up. And so it hit iron ore and all that sort of stuff. But it's been a long time now and those savings have gone out into the rest of the world and propped up everybody else's markets because there were billions and trillions of them. And at some point in the next five years, those savings will start to slow and the spending will start to pick up, and then it'll go on just like the rest of us having a five per cent good year rather than a 15 per cent good year. In other words, they've moved onto the third stage.

So what do you do about that? Well obviously after 2008 where they were the only game in town, if you bought those multinationals that's got more than 50 per cent of their revenue in China, they went like a rocket because they were all cheap because of the stock market crash, but their revenue's kept up because they were selling into China. So I guess really if they get moderately cheap again, then they would be a good buy anyway. When China moves on and they start to spend more, and also obviously they've had to readjust their stock market from companies that were totally into exporting to companies that are totally internally focused as well. And there'll be a few opportunities there. So I think China, yes, they've had a big impact and for the next little while they'll continue to have an impact on the Australian dollar and I think it'll continue to fall, but I think they'll get to that levelling off and change their economy fairly rapidly and there'll be different sorts of stocks that will be good to buy. And global stocks that have been in there for quite a while and new ones getting in there and it'll represent a great opportunity.

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