Use China to predict the future of equities
At the start of the century, strong economic growth in places like China and India prompted a new investment perspective.
The BRICs (Brazil, Russia, India and China) concept was born and equity funds were developed to accommodate a new desire to invest in those countries. Soon, some economists proposed that a decoupling between BRICs and developed countries was occurring.
People thought strong economic growth would insulate the BRICs from a crisis elsewhere. Not surprisingly, the decoupling idea was rejected when the recent crisis seemed to affect everyone; the world is just too economically interrelated.
But lately, interest in “decoupling” has re-emerged, following news that China and India are exhibiting significant growth. Together with the stimulus packages in the USA, UK and Europe, an even more painful and protracted recession can perhaps be avoided. The more positive outlook has lifted equity markets.
The debate on decoupling may be seen as just academic and of little significance, but to my mind there are practical implications we ought to take to heart:
l Regardless of how pessimistic we are about short-term economic prospects, growth in places like China and India does provide a measure of encouragement that the recession will be less severe and less protracted. In deciding whether to invest in the markets at all, this suggests making a larger allocation to equities than one was willing to entertain some months ago.
l We are likely to see significantly faster growth in countries like India and China for the foreseeable future. In reassessing one’s asset allocation, over-weighting BRICs makes sense.
l Activity in developed countries associated with BRIC demand affects certain industries but not all. Normally we are better off choosing companies whose goods are in demand; the notion is even more compelling today. Certain companies will enjoy decent growth while others will continue to suffer from the current downturn. In the segment dedicated to equities in the developed world, one should select discretely, targeting companies benefiting from the current configuration of demand.