Speaker: Thomas S. White, Jr. Chairman, CIO Thomas White International
As a global asset management firm, our analysts cover the 45 Developed and Emerging Market countries in the MSCI All-country World Index. Each December our senior analysts in Chicago and Bangalore meet to evaluate market trends and adjust our investment strategies accordingly.
While global equity markets should continue to produce positive returns, we believe the major surprise in 2015 will be that the MSCI China Index outperforms the S&P 500. Here’s our logic:
China enjoys most of the attributes that give a country the foundation for a long period of sustained growth. China’s huge population is hungry for growth. With such a large domestic market, the dominant companies in China can easily compete on a global scale.
China has moved over 500 million rural farmers to cities. There they have become the productive labor force required in a modern nation. Major infrastructure projects continue to improve the country’s productivity.
After the financial collapse in 2008, China’s leaders recognized the need to transition their economy to a more sustainable consumer-oriented model.
They have been orchestrating this difficult adjustment since then, and doing so without letting GDP growth fall below 7%. The skills needed to execute this major shift were gained over the 30 years it has taken to transform China into a market-driven economy.
Today, Chinese equities are trading well below their normal valuation ratios. This sharply increases their potential for a sizable return.
Given the mild 3% gain in the China Index in 2014, it is obvious to us few investors share our enthusiasm for China. That said, we have found when the majority of asset managers disagree with our recommendation, the investment has an increased chance of doing well.
We see continuing modernization of China’s stock and fixed-income markets. Each major problem, such as trust loans, has been addressed with risks eventually reduced.
We find it curious that global investors don’t appreciate that Chinese policymakers have been far more successful than their peers in the developed countries. While Developed Market countries have spent billions since 2008 in an effort to revive growth, China is half way through the process of transitioning their economy -- which is larger than Europe -- while maintaining 7%-plus growth.
We feel the China Index is ready to break out of its trading range given these recent positive events:
- The fall in energy prices is a net positive for China, especially for Chinese consumers.
- US economic growth will benefit China’s exports.
- The China Index is priced in Hong Kong dollars, which are pegged to the U.S. dollar, so the China index should avoid being damaged by the strength in the U.S. dollar.
Let me leave you with one concluding thought: when considering your allocation to China, don't wait until the MSCI China Index begins its advance, as you may not be able to capture all of the potential return.
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FORWARD LOOKING STATEMENTS
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