With China’s economy wobbling, the US remains my safest bet
One of the many things about the US I have always admired is her ability to adapt, pivot, retool etc in the face of adversity and to get things back on track. I think a big reason for this ability is in the US’s make up: the US is essentially 50 separate but related countries all competing against each other for land, labour, capital and effectively, entrepreneurship. Notwithstanding the inevitable ups and downs, that system breeds and fosters economic success as evident in the sheer scale of her US$27 trillion economy.
When the macro environment is good (inflation is steady, interest rates are past their peak, stable and/or declining, economic activity and growth is healthy) we know asset markets including shares, bonds and real estate invariably perform well. We may be heading into such an environment at the present time.
The amazing thing about the US share market (remember we typically use the S&P 500 as a good representative) is that it more than sort of looks like US economy. The corporate representation of its constituents reasonably closely reflects the make-up of the economy or put another way, “you get what you buy”. There are lots of information technology companies in the index, a decent whack of healthcare, a broad bunch of financials, a smattering of industrials, a smidgen of consumer, and a dollop of energy. The two largest export markets for the US are its immediate neighbours. To the north, Canada takes approximately 18% of US exports while down south Mexico accounts for a similar amount at 16%. Notably, China is next at 8% and I will come back to China later. So, buying the S&P 500 can be a great way of buying into the recovery and success of a re-emerging US economy.
In contrast, the Australian and New Zealand share markets can be described as somewhat comparatively strange as in both cases they don’t reflect their respectively underlying economies. Essentially and I acknowledge in very general terms, the Australian share market comprises a whole load of companies that dig stuff out of the ground and banks that finance them. BHP exports are only around 5% of Australian GDP. On the other hand and maybe even more strangely, the NZ share market has some hydro-electric power companies, a neat SaaS business in Xero (albeit Aussie listed), an outstanding healthcare engineering company in Fisher & Paykel Healthcare among a few other stars. Dairy, and Fonterra is a big part of this, accounts for a whopping and scary 20% of New Zealand’s total exports.
If you look at a few New Zealand domestic economic indicators a number of them currently face real headwinds: NZ Whole Milk Powder prices are nearly half of their peak in December 2021 and down some 17% this month. The New Zealand dollar is trading below 60c against the greenback and looking very vulnerable on the charts and might go lower, with the current account deficit reaching a worrying and staggering 8.5% of GDP. Interest rates are as high as I can go back on a chart, GDP growth was +2.9% to March and arguably lower and further masked by the current immigration surge. Gross Government debt is ~$135bn and going higher fast. And to make matters worse it looks as if our largest trading partner, China, may be in some strife. Yikes!
In fact, China is in a world of pain right now – period! China is New Zealand’s largest export partner (some 25% of exports), which when measured by that export share percentage, makes us the fourth most concentrated single country exposed to China in the world. Bard tells me that we’re not far behind Hong Kong (44%), Australia (34%) and Macau (31%) acknowledging of course that two of those border China and effectively part of China Inc anyway. It’s then daylight back to Japan at 19%.
China’s GDP growth – if one can believe the stats – was 0.8% in the June quarter, a far cry from the 10% plus it was a year for decades. Their CPI is negative, we call that deflation, youth unemployment is over 20% and climbing. Authorities have now stopped publishing updates. What’s caused the sudden deterioration? That’s a really complex question that we probably can’t answer (because we just don’t know but I would throw confidence in there) but the China property sector is definitively at the core. The Chinese property market is approximately 70% of Chinese household wealth and the property market is 20% of GDP. According to Bloomberg, close to 60% (US$116 billion) of Chinese offshore real estate bonds are currently labelled ‘distressed’ and the poster child property developer, Country Garden (the major shareholder was at one stage the richest person in China) was unable to make two bond payments on August 6th. That’s not good for our largest trading partner. It’s no wonder that New Zealand is about to send one of its largest business delegations ever to India next week, some 50 representatives are on their way. We need export market diversification.
It was Austrian diplomat Klemens von Metternich who coined the phrase “When America sneezes, the world catches a cold” – China looks like it has more than a sneeze going on and that makes me very nervous along with all the other indicators.
From a quick check on Bloomberg, New Zealand companies with significant top line exposure to China include: a2 Milk (50%), Comvita (46%), Fonterra (27%) and Sanford (15%).
History suggests that when we have big global shocks (like Covid) the US comes out strongest and fastest. Europe and the UK are still struggling. If China is indeed stalling, wobbling, sliding etc I know where I would like a lot of my investments even just for a hedge on the NZ dollar.
Next week: overview of the New Zealand share market reporting season which is well underway.