Wednesday, July 19, 2006

The China file

A couple of items in the news medium recently caught my attention, both relating to a favorite topic of mine: emerging markets. I have long argued (1,2)that most long-term investors are poorly served by the traditionalist advisors on the emerging market side, suggesting that portfolio weightings of 5%, or perhaps 10% are appropriate.

China recently announced blow-out numbers, with second quarter GDP expoloding by 11.3%, compared to 10.3% in the first quarter, and an official government target of 8%. Here are some figures for the first half of 2006 for China, together with the goverment target (target is bracketed):

Real GDP growth: 10.3% (8% target)
Investment in fixed assets: 31.3% (18%)
Money supply growth: 17.4% (16%)
Trade: 23.0% (15%)
Inflation: 1.3% (less than 3%)

India too, grew at 9.3% for the first quarter, nearly tracking the dragon nation.

China is forecast to continue growing in the medium term in the 7-10% range, while India is forecast also for growth in the 6-9% range.

Finally, a recent report by Scotia Bank economists Warren Justin and Mary Webb indicated that, based on purchasing power parity, newly industrialized Asian nations now account for 30% of global GDP. Even accounting for trade in U.S. dollars, newly industrialized Asian nations account for 12% of global GDP.

And your advisor is telling you to put only 5% or 10% of your portfolio into emerging nations? And you say you're a long-term investor? Really? Then why are you underweighting your portfolio so badly??


The Confused Capitalist


Anonymous said...

Money supply growth of 17% vs. GDP of 10% ...... something sounds unsustainable here ..... reminds me of Japan mid-80's .... any thoughts ?

Anonymous said...

What about the volatility of these markets? Isn't that a good reason for some investors to reduce their exposure?

Jay Walker said...

Money supply growth usually exceeds GDP growth by a good strech. I think M2 in the US has been in the 7-10% range over the past while, but that's just a bit of a guess.

I don't think the money supply growth is worrying.

Volatility is something that long-term investors should be able to handle. Short-term traders may have issues with it. As Warren Buffett says, we prefer a lumpy 15% growth to a smooth 12%, because we're investing long enough to capture the 15% vs 12% effect.

What I found most interesting in all those statistics was inflation - absolutely minimal at 1.3%, with a GDP on fire like that. Wow - amazing.


Amit said...

just because the economy in these countries is growing at 10% or so does not mean the stock market will also grow at those rates. e.g. There are western companies whose business is growing there. While this affects the GDP of China/India, it does not directly benefit any invetments you may have in China/India.

I am Indian and would love there to be a direct relationship like this, but it simply does not exist.

Jay Walker said...

You are quite correct of course, but one can't ignore that local stocks are most likely to be the prime beneficiary of rapid growth rates.

And that's one reason why I'm such a big proponent of emerging market stocks, but the second reason (and perhaps more important), is their valuations.

You get more growth at a cheaper price. I like that