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U.S. investors are rightly nervous about the government shutdown and the debt-ceiling deadline, which takes place a week from today.
But at least one legendary investor sees opportunity, even after U.S. stocks, the benchmark for the world, fell almost every day for the past two weeks. And he’s looking elsewhere — in one of the world’s worst-performing groups of equity markets.
Jim O’Neill coined the acronym “BRIC” in 2001 to describe the most relevant emerging-market nations: Brazil, Russia, India and China. Stocks in those countries led the world in performance until the financial crisis five years ago. Since then, they’ve badly underperformed — the MSCI Emerging Market Index is down 4.7 percent this year, compared with a 19 percent gain for the S&P 500 Index of the largest U.S. stocks.
O’Neill, who built his reputation at Goldman Sachs, now expects a rebound in the developing world, especially China. So now may be the time to tune out Washington’s follies.
Let’s break down O’Neill’s analysis.
No Hard Landing
In a recent article for Bloomberg, O’Neill points out the many naysayers who are predicting a “hard landing” for China’s economy may be wrong again. He notes that China’s GDP at $9 trillion is more than half the size of the U.S. economy and three times that of France and the U.K. In fact, China is adding $1 trillion per year to global GDP growth.
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| China’s GDP is still the envy of every developed nation in the world. |
Whatever “slowdown” China has experienced — to its present growth rate of 7.5 percent annually — is still the envy of every developed nation on earth. The U.S. economy, by contrast, is expanding 2.4 percent.
The China story today, however, is one of transformation. Beijing’s leaders embarked several years ago on a plan to rebalance the country’s growth, emphasizing consumer spending instead of exports. Have they succeeded?
Big-Time Growth
The naysayers deride China’s explosive monetary growth in recent years as out-of-control lending and rampant real-estate speculation that’s bound to end badly — as in the American experience — in a horrific credit crisis. Perhaps there’s some truth to that, but China’s economy isn’t nearly as dependent on home-price appreciation and easy lending practices as the U.S. was just a few years ago.
Far from being in debt up to their eyeballs, Chinese consumers enjoy a 38 percent savings rate, the envy of nearly every major economy. In fact, several basic fundamental measures of China’s internal economic growth point the way to a successful rebalancing.
- Retail sales, adjusted for inflation, are rising 10.5 percent a year, almost four times that of the U.S.
- Domestic rail freight volume is up 7.9 percent annually, a sure sign of healthy commerce even as export growth slows.
- Domestic power production is increasing 13.4 percent annually, which indicates more consumers hooking up to the electrical grid.
As O’Neill points out, the transformation means that the “winning investments [in China] will be quite different than before.”
Ignore Past Winners
China’s main Shanghai stock index, widely reported in the financial press, may be a misleading measure, according to O’Neill. “The Shanghai index is dominated by past winners in the China growth story” — mostly large state-owned companies focused on export growth. He concludes by pointing out that China’s more domestic-focused Shenzhen index “is performing much better than the Shanghai index, thanks to its greater exposure to newer, smaller, private companies.”
In fact, China’s economic rebalancing act is highlighted by a big difference in performance for different China-tracking ETFs.
For instance, the iShares FTSE China 25 Index ETF (FXI), still the most widely traded ETF for China, is dominated by state-owned enterprises — China’s past winners. FXI is down 7.2 percent this year. Meanwhile, the Guggenheim China Small-Cap ETF (HAO), which is more focused on domestic stocks, has gained 5.8 percent.
Besides Guggenheim China Small-Cap, there are several other ETFs that tap into the growth potential found in smaller, privately owned companies, not only in China, but also in Brazil, Russia and India. To see my complete list, visit Money and Markets’ Facebook page.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.