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China: 'people will wonder why on earth' they invested

China's 10-year growth boom is coming to an end, Newton Global Higher Income manager James Harries warns.

 
China: 'people will wonder why on earth' they invested

A slowdown in China is set to have a wide-ranging impact on a raft of currencies, Newton Global Higher Income manager James Harries says, in a grim warning that the 'long-term trend is down'.

This view has led him to reduce his equity exposure to the region, and hedge some of his Australian and Canadian dollar, South African rand, and Brazilian real exposure back into the US dollar over recent months. The Newton Global Higher Income fund features in Citywire Selection, our guide to the best investment ideas.

‘We remain sceptical on companies, sectors and economies dependent on China because we think the 10-year boom is coming to an end,' he said. 'China has not had a down cycle for 10 years, and people have become used to dramatic growth numbers. It has had a very substantial boom, so at some point it will have some kind of bust and we think that is now unfolding.

‘While it has had a small bounce we think the long-term trend is down, and at some point we think people will wonder why on earth they put any money there at all.’

China watchers have a busy week ahead of them, as Thursday will see the opening of the 18th congress of the nation's Communist Party, the first stage of a process that will usher in a new generation of unelected leaders.

Prepare for volatility

Another key theme for Harries remains how the huge global deleveraging phase is leading to shorter and more volatile business cycles. He also said the combination of a difficult economic backdrop with ‘pretty poor starting valuations for all asset classes means that equities do not look good on a cyclically adjusted basis’.

He remains wary of the banking sector, which he thinks has a long way to go before it is sufficiently capitalised, and the sector remains a key underweight at 5% under the benchmark.

The £3 billion fund retained a significant 8% overweight to telecoms at the end of September with healthcare, consumer goods and utilities weightings all higher than the benchmark. 

‘We remain positive on areas related to data growth, such as smartphones and handsets, and are also optimistic on healthcare. It is exciting how pharma firms have begun to pick up and produce some innovation for the first time in a long time. We had not factored that into the sector [previously].'

Harries is also positive on consumer staples, another key overweight, which he describes as an ‘island of stability against a difficult backdrop’.

Looking to the US

Owing mainly to his bearish China view, exposure to emerging markets and Asia in particular has been gradually reduced, while the US weighting has been gradually built up, to 36%, albeit still more than 14% below the benchmark.

‘The US economy looks well placed. It has cheap housing, in stark contrast to our own, and cheap energy due to the shale gas revolution. It also has a lot of slack in the labour market and real wages have gone nowhere for a decade, which gives the economy a degree of competitiveness.’

His European exposure remains concentrated in core Europe, particularly Switzerland, Germany, the UK and Norway, and there is no exposure to the peripheral countries. ‘If there is a default-style event, or the imposition of a fiscal framework to go alongside the monetary framework, we should probably change that view but it has not happened yet.’

Over five years to the end of September the fund has returned 36.5% compared with a 16.53% rise in its benchmark MSCI World index.

Citywire Selection verdict

James Harries is one of the best readers of the macro backdrop and remains in bearish mode. He is particularly wary of the Chinese business cycle and global deleveraging, but this has not stopped him delivering strong returns over the past year and over all time periods since the fund was launched. He is heavily backing the US and its currency and those countries with financial clout such as Germany, Switzerland, Norway and Singapore.

25 comments so far. Why not have your say?

Geoff Downs

Nov 06, 2012 at 09:02

I agree with a lot of this article, especially about China. Then the remarks about the US seem odd. The latest earnings there are grim, so I don't get his views at all.

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Broomtree

Nov 06, 2012 at 09:50

This fund has been one of my core holdings and has performed very well through difficult markets. Does seem to have been going sideways the last month or so, probably explained by his China call as it has improved recently as pointed out - China soft or hard landing is increasingly the great debate but the prospects going foward do not look good! Today's US election and how quickly a policy going forward becomes clear and established may be the counter-balance

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Graham Barlow

Nov 06, 2012 at 10:43

China is inscrutable .Just look at the hard facts. China's low cost production is now fading fast' Wages have risen by 16% pa over last 5 years. Demographically China is getting older ,facing colossal care costs in the next 20 years. China's state Industries which are many ,largely lose money and are heavily subsidised.. Chinese property prices in Cities are still considered to be at bubble heights, The big 10 year Political changeover is 25 Nov. The rumblings as to who will hold power does not bode well fo foreign investment opportunities. Maoist ideas are still around. China is showing Nationalistic tendencies of late, which might manifest themselves in agressive sabre rattling. The economy has been largely built on the export market ,which is not just economically slowing down ,it is changing markets as more consumer countries are reverting to home production, like America and even Europe is repatriating production. This trend will accellerate and become permanent as China looses its low cost edge. China has already lost its bonanza mantle for investers. There will be opportunities ,but will it be worth it?

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Rob Walker

Nov 06, 2012 at 13:11

In any economy as large as China's there will always be investment opportunities. I am puzzled why such influential investors running leading funds can't pick winners in any large economy. To label such huge markets as China, Japan or USA as 'good' or 'bad' doesn't say much for their expertise.

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joe stalin

Nov 06, 2012 at 13:41

The reason why people have been putting money in China is because they dont appear to have politicians with a knack of meddling and screwing things up.China's landing from what I read appears to be heading for a soft one so no worries there. What investors such as Mr Harries seems to be missing is the fact that China has been investing aggressively in growth markets in the developing world. Froam the Asean region to africa and even Latam infrastructure projects abound. I dont make a living out of investing in China per se but many have been trying to short China aggressivelysuch as Jim Chanos, with much talk of property bubblesand so on. China may well go the same was as Japan, Taiwan and Korea in time but I would suggest that that is not in the foreseeable future and may even be a decade or two away given the massive disparity in internal wealth distribution. If China is no longer going to be the world's manufacturing base then who will take its place, I seem to remember reading in the history books that we used to maufacture the odd thing in this country a long long time ago. You can say what you like about the Chinese, . but a tendency to self -destruct in pursuit of some idealogy like we did they don't appear to have. Ok returns may be harder to come by in the years ahead which may mean that the likes of Mr Harries have to do a little more travelling to get an idea of what is going on, but hey a bit of research from time to time never hurt anyone when it comes to coming up with an investment idea. (that said I would get more worried if Mark Mobius were to throw in the towel )You can fret all you like about the "elections" on 25th November but my guess is that it will be business as usual with money allocated to infrastucture domestically and overseas and a bit of bond buying in Europe and the US.which is just as well for the rest of us

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alan franklin

Nov 06, 2012 at 13:52

"Emerging economies" are best defined as countries it is difficult to emerge from with your money.

I always thought it unwise to invest anywhere without the rule of law: Russia and China are obvious examples and friends in business there tell me South Africa is now in much the same state.

In other words: if you invest and don't think you get a fair return, don't expect justice from local courts. China could just one day reclaim all foreign assets. They are certainly neither our friends nor a fair, free and open society. Expect big trouble there, especially when food prices rise.

I am in St. Louis, in America's heartland, and have just travelled about 2,000 miles around America. The economy is not half as bad as I expected and seems better than, say, two years ago.

The roads are packed,shoppers are shopping and most people seem to be in work.

Whether this will last long is another matter: expect big problems around the turn of the year.

If Romney gets in, backs coal, cuts red tape and allows more onshore oil exploration, many of the USA's troubles would gradually vanish and the nation could actually become an oil exporter again. That's a big if, with the greenies ever wanting to interfere. Today's a big day!

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Geoff Downs

Nov 06, 2012 at 13:52

China may be the manufacturing hub of the world. It is the US deficits that have helped China prosper. On the basis the US tackle debt it will effect China in a significant way.

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Geoff Downs

Nov 06, 2012 at 14:03

Alan,

With respect, the US is massively in debt. No attempt has even started to reduce it. Unless there is a miracle on the horizon then times will get very hard indeed.

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snoekie

Nov 06, 2012 at 16:34

Joe, I think you have misunderstand China. Their politicians are pulling the strings daily, so they are interfering.

China is striving to retain its cheap manufacturing. There was a story a few days ago about them relocating mountain people, a number of millions of them, to urban areas, moving them out of their rural existance, and for that there are going to need to be jobs, unskilled, because there will be precious few agricultural opportunities in towns/suburbs.

And then there is the practice in China that their people can steal copyrighted/patented products and exploit them without so much as a 'howdy doodi' to the owners, and not allowing infringement actions, or if they do a tedious process and then the individual stops and starts something else.

The quality of the Chinese product is what was the Japanese did many(circa 50) years ago (crap).

Whilst it may be an area that will grow, I trust not them in charge, and getting info is hard so it is an area I have never been tempted by, because of the inscrutable nature of the people in charge. They buy up projects for raw materials, and then treat the people like dirt, shipping in a lot of their own people for the overseeing. In many places the 'pheasants' are revolting and given the one way nature of the jobs, I foresee that quite soon govts are soon going to start trying to protect there local situations, not like our insane politicians, giving subsidies to the likes of Turkey so they can do a cheaper job than the locals here.

Soon (but not soon enough) the unions may finally wake up and be more co-operative on their excessive demands to 'protect' their members (unless the lefties get going and donate our jobs to their mates abroad so they can stir the brown and smelly here). But then you know this because this is what you namesake did.

As for the States, for all their prospects, they are in deep doodoo, their debts and reliance on borrowed money to live the American dream. They are beginning to realise that they have to pull their horns in. That will take time, so for all the population increase, the need for economy is going to be the constraining factor.

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snoekie

Nov 06, 2012 at 16:58

Oops, "have misunderstand", should be either 'have misunderstood' or 'misundertstand' on its own.

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Michael Rosenberg

Nov 06, 2012 at 17:24

It's amazing .for years the china doubters have been shouting decline and fall but all that has happened is that growth has slowed from an unsustainable 10 per cent to under 7 per cent and no doubt will steady at nearer 5 per cent over the next few years. In the space of around ten years around 300 million people's have moved from poverty to a reasonable standard of living. No other country can match that performance.

Within a few years china will probably own a large chunk of natural resources around the world and probably a large chunk of western industries. Of course there will be ups and downs along the way but those who write off china now and put their bet on USA will wonder why they did that in five years time. Those 300 million consumers and their kids will want all the goodies that we in the west have enjoyed . Watch that space

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anil kumar

Nov 06, 2012 at 18:49

Remember the old saying''The USA is a great place for an exporter in Japan''?Well its been the same for China.As long as the USA+Europe keep on buying Chinese ''junk'',its exports will do ok.The rest of the Third World,including Africa cannot AFFORD to buy anything but Made in China,so another plus for Chinese exporters.To whatever extent exports have slowed,the next opportunity is in incresed home demand.So companies focused on local demand will do better as long as domestic demand grows.Then there is the demand for foreign luxary goods from the millionaires created by exports,real estate boom,successful domestic brands.For the foreign investor,mindful of the lack of rule of law and dodgy accounting practices in China,buying into the large well diversified luxary brand names could be the way to invest in China's prosperity, uptil such time the demand for these brands sustains.Chinese Banks are a cartel with the government.No one knows whats going on and books are probably cooked.

Of course growth will slow down,but it will at least be double of the best of the Western economies for the forseable future.

So take your pick.

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William Bishop

Nov 06, 2012 at 18:51

Making money in China is by no means easy even when the economy is going at full blast. The system favours state-owned enterprises, followed by local entrepreneurs, and the pickings left for foreign-owned businesses are poor by comparison, leading to, at best, a disappointingly low level of profitability.

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Geoff Downs

Nov 06, 2012 at 18:56

In my view China is due a major correction, then I think that about stock markets in general. Have I been correct, NO!

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Magic Monty

Nov 07, 2012 at 04:55

Hi Graham Barlow,

A lot of your comments about China are totally incorrect and not based upon fact, here are some examples;

Wages have risen some 16% over the past years.

(actaully average c.8.5% / Annum over the last 5 years)

There are no colossal care costs at all. Actually there are net zero fiscally.

(China has no 'paid for' healthcare - You get a disease, cannot afford treatement you die, it's very simple)

Also - You don't work, you don't get any money. Hence none of these Billions of wasters bleeding the system like in Europe [Apologies to the genuine temporary out of work job seekers]

One Senior Chinese Officicial on a study visit to the UK said - They have no money, huge debts and pay people to not work, many take drugs and drink. This is not even a short term payment but continues year after year. The country is surely fiscally doomed unless it changes this policy.....

China is less nationilistic than USA in it's news retorics - It shows more respect than other Nations in this area.

China's property now has many profit taxes and lending restrictions - You must pay 50% up front on 1st properties and 100% for 2nd properties. There is hence little or no gearing on the banks.

The New leader will follow along the Western friendly good to do business with as the previous Leaders. Don't fret over your CNN BBC Propaganda.

KEY FACTORS:

China has net savings, gold, cask and foreign invested treasuries. It's cash rich and hence is master of its own destiny. It will see a slowdown in its economy maybe to 3 or 4% over the next 5 years, still the envy of Britain and many on zero. It is full of International companies selling to the china market many finsished goods and it exports a lot too. The piece parts export from China a 20 to 30% cheaper D2D price are all but over, the finsihed goods are getting more expensive but it will switch to a largely self sustainable economy like Singapore and Taiwan.

For Investors, the markets will shoot up when they are opened more Internationally and when the Chinese government tell the people the markets are too cheap. Anthony Bolton and his China fund was stupid and showed him up as an amatuer when investing in China. Had a laugh over the disastrous updates from a highly rated UK Fund Manager...Stick to what you know Anthony. There are huge amounts of money to be made investing in China, you just gotta know what your doing and be connected on the inside.

END

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Magic Monty

Nov 07, 2012 at 05:01

Joe Stalin & Rob Walker.

Both articles spot on.

I have lived and worked in China for 11 years, Speak fairly fluent Mandarin, have a Chinese wife and family and am the only expat running a Hi Tech US Company,

You both see through the retoric and media to assess the actual facts on the ground very accurately.

END

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joe stalin

Nov 07, 2012 at 10:03

It is really good to get some feedback from somebody who is actually on the ground and making a living in China! While I have frequently visited HK over my life I have yet to venture into China proper. That said I have seen a massive transformation in HK which slowly but surely is becoming more Chinese every time I go there. I am not saying it is a bad thing by any means particulary given the absolutely massive investment that is going into the former colony.The conclusion I came to many years ago is that the Chinese have an enterprenureal mind set and a disciplined determination to succeed once an objective has been set. I dabble in a couple of China plays and I am sure like many I am often frustrated by a lack of transparency but i am confident that in time that too will change as China continues to seek inward investment. Early days and much too soon to throw in the towel.

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anil kumar

Nov 07, 2012 at 12:55

Thank you for an ''insiders' view point on China.Always helpful for us outsiders.But while noone doubts about the infinite opportunities to make money in China,thediscussion is perhaps more about how a foreign investor can make money in China ??More specific details on that aspect would be more useful perhaps ?

Thanks

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Magic Monty

Nov 07, 2012 at 14:12

Hi Anil,

I would avoid chasing Investements in China is my message, hence the references to Anthony Bolton AAA investor.

Most Companies doing screaming levels of business in China are mainly US Co's

Starbucks - Hugely poular, more expensive than the west, their numbers just came out so too late to get the big rise.

The new one opening showrooms everywhere and selling huge numbers of Mororbikes is "Harley Davidson" The rich Chinese are going for them as toys....We have millions of super rich Chinese - It's not all rages and begging.

I never trade US shares, cannot be bothered and don't like the losses on the exchange rates.

Hope the above is helpful.

MM

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Magic Monty

Nov 07, 2012 at 14:32

Hi Jo,

Thanks for your reply - I purchased about 20KGBP in Fosun Medical on the Mainland B market...Around 14RMB / share, they are now down to 9RMB and drifting down or flat for 2 years. Every year their numbers are better both top and bottom line and the P/E ratio in single figures. Even my Chinese Fincial Manager has followed me in on Fosun Medical but waste of time for both of us so far.......Primary Reason Government told the people the Chinese market was overvalued and they should keep their money safe in banks..6% interest if fixed for 1 year a few months back. The Chinese buy on name and trend, rarely on the fundamentals and many like to day trade. So no earth shatering news and good shares with great fundamentals get ignored, folks get impatient and sell slowly over timne the shales fall significantly.

Foreigners can only access the A market which is very over priced in my view and you can access these companies via Hong Kong dealers etc most banks have HK Caccounts and can trade for you in the major shares like China Telecom etc.

I personally would avoid, my favourite shares are UK high yeilding shares having learnt how to invest since I was 18 years old - Now over 50. So latest buys have been First Group & IRP, both over 10% yeilders and my star is Alpha Pyranees Trust about 14% yeild at 19p to buy...ALPH. I make more money on dividends than salary same as Warren Buffett....Only much smaller scale. Try to avoid too much risk..If buying AIM shares make sure the Direcxtors don't own to much...They can vote to delist and you'll loose your investments. Be real carefull of miners, Oil and these days Banks. This in a few words is my advice for your investing. Look and jusge this message in a year or two an see if I was on the mark with my advice. Investing is fun and you'll loose before you gain quite often.....Always Enjoy and when you loose remember its only money and "you" gambled.

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anil kumar

Nov 07, 2012 at 19:14

Hi Monty,

Thanks,your input much appreciated.I have only one Chinese listed co in my portfolio,Jianxi Copper and I am in the black.I have the likes of Starbucks,Yum Brands,Samsonite,Gucci,LVMH,Prada,The Casino operators on my radar.I shall add Harley Davidson.

Thanks

Anil

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Chops

Nov 08, 2012 at 13:37

I think Anil hit it on the head when he said growth will slow but will still be double what we see in the 'developed' world. And when you combine that with an economy and population the size of China's then it makes for a very (relatively) strong investment case. Anybody who invested banking on 10%pa GDP growth in perpetuity needs to read some history books.

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Michael Rosenberg

Nov 08, 2012 at 14:50

It's simple really. Who owns America these days? Answer the Chinese .

Who has the fastest growth rates for a major country in the world ( excluding Libya)- Answer China

Who has a highly educated and motivated culture with massive leaps in technology knowledge which are happening now. China

Which country is more likely to manage its economy with skill and determination over the next five years. China

And think about the day when the renminbi becomes fully convertible and guess where most people will put their money.

Of course it's still dealing with the Wild West syndrome of silly values on the stock exchange but we in the west are hardly the ones to be throwing stones at that syndrome, THe stupidity and greed of American investment banks that fell over themselves to bring Chinese companies with little or no corporate governance can only be deplored. But they were just as guilty in many other cases so nothing new there. Careful selection of local partners and proper due diligence and understanding of local culture will eventually prevail.

I speak as someone who has travelled to china regularly since 1978 so think I have a good feel for the culture and the issues. Just do not get carried away as some have by over enthusiasm. Timing is everything. I think that the west totally underestimates the rise of local technology in that market which in a few years will dominate our lives.

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Rob Walker

Nov 11, 2012 at 10:46

I've just been reading the various contributions above and am particularly grateful for valuable advice from Joe Stalin, Anil, Magic Monty and Michael Rosenberg. So much more clarity and conviction than the wooley each-way bets we get from the Fund Manager / Commentators. While the 'Experts' rely on ratios, economic forecasts and financial results, they have little to say about transformational change, because it is not within their sphere of expertise. Anecdotal stories about the popularity of Harley Davidsons and info on how Chinese culture will impact the future are the real pointers that investors should take on board. We really need to do more research into tomorrow - When China Rules The World and all that - instead of just having a punt on today's likely lads.

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Geoff Downs

Nov 11, 2012 at 11:28

China's growth has been fuelled by the West's deficits, especially the US. If the US economy gets into further trouble it will cause a big problem for China.

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