Even ten years ago it would have been absurd to say that when China sneezed, the rest of the world caught a cold – most other countries would barely have heard the noise, let alone felt any ill effects. But it is now clear that the world is feeling very much the worse for wear because of the sharp slowdown in Chinese growth to a 25-year low in 2015.
The economic damage is widespread. Muted growth in Chinese demand for commodities such as copper has hit Latin America; falls in car imports have affected Germany; lackluster purchasing of steel, computers and audio equipment has hurt Japan Inc.
Korea, a highly export-focused country, is an even more interesting example: it’s afflicted by both diminished Chinese hunger and a drop in imports by Russia, which itself is suffering from low oil prices. The slowdown in China has hit world trade in general, as patients who breathed in the Chinese sneeze pass the germs onto other countries, which then pass it further down the line.
With their export markets looking much less promising because of weakening sales to China, these economies will now have to rely much more on generating their own demand. But their ability to do so varies widely from country to country.
Germany has exerted a disciplined approach to spending and borrowing over the years, and it can now benefit from the consequences. The government can increase spending to accommodate its many new refugees without incurring more than a small budget deficit; it’s unlikely that Germany’s famously financially prudent citizens are going to learn to love debt any time soon, but rising real wages and low unemployment are putting more cash in their pockets, and strong retail figures show they are happy to spend it.
Japan faces a challenge: it must persuade its citizens to spend. Whether it can do so is not completely clear. Decades of deflation depressed consumption – why buy today, when you can buy for less tomorrow? The latest data show consumer price inflation at precisely 0% – the borderline between deflation and inflation, and far from the Bank of Japan’s (BOJ) ambitious 2% target.
However, in January the BOJ introduced negative interest rates, which should help to return Japan to inflation over the course of time by stimulating domestic demand. The government may also seek to safeguard personal spending by postponing or at least diluting the planned April 2017 increase in sales tax.
Other countries will find it harder to generate home-grown spending to compensate for China’s reduced appetite, however. In Brazil, high interest rates, forced on the central bank because of rampant inflation, have left families struggling to keep up on their loan payments. Because of this, they will be less likely to spend their weekends engaging in retail therapy unless they’re then happy to seek debt counselling afterwards. Korean household debt is already so high that it will be hard for consumers to take up the slack.
What does this mean for assets? It’s best to think not in terms of different asset classes, but of a theme that cuts across different asset classes: personal consumption. It will not be universally high across the world. But it’s likely to be durable in a wide variety of countries, including Germany and the UK –where consumer confidence is buoyed by low unemployment – and China. China? That’s not my typo: although Chinese economic growth is likely to slacken further, household spending will be relatively resilient – the slowdown will primarily come from a reduced growth in construction activities or fixed asset investment growth.
Against this backdrop, attractive assets include listed equities, private equity and property with exposure to mass consumables and mass consumption. Think of a warehouse in Germany crammed with stock sold on the web; think of a private equity investment in a restaurant chain, with the company’s debt used to fund a rollout of new outlets. But don’t think of a company making expensive luxury knitwear: the crackdown on corruption in China, the source of one-third of the earnings of some luxury goods companies, has hit the sales of such items. It pays to be selective, rather than investing in a particular theme without discernment. You wouldn’t buy an expensive scarf without trying it on and peering in the mirror; you shouldn’t buy into an investment without undertaking an even more rigorous analysis.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.