The Tide Turns

Robert Lloyd George (pictured) is running Quaero Capital’s Argos Bamboo fund, that invests in Greater China, Japan, India and Asean markets.

At last investor sentiment towards China and the Asian markets is beginning to improve, and the summer storm is clearing. Although world growth has slowed, we believe there are still positives for global consumers in the dramatic fall in energy prices, and we have looked at some of the secondary consequences.

The impact of China’s US$11trn economy on global demand, and especially in other emerging markets, is extremely important, not only for commodities but also for consumer goods, automobiles, luxury goods and services. Over-supply of commodities is likely to keep prices down, and as China’s GDP growth slows to 5-6%, so will its energy needs.

In the next five years, we expect China to become much more like a European economy with the service sector exceeding 50% of GDP.

Foreign trade, which accounts for almost 50% of GDP in China, compared to 13% in the US, is enormously important. China’s overwhelming presence in many product markets will not go away. It has a large trade surplus and huge foreign reserves, and there is no reason for Renminbi weakness, if Beijing wants to support it.

China’s focus is now on financial reform and innovation, with the opening up of the banking and securities industries. Financial liberalisation will boost the outflow of Chinese capital into global markets. Beijing has also put its full weight behind the new Asian Infrastructure and Investment Bank and related free trade agreements.

We believe Southeast Asia and China’s trading partners will benefit from these factors, so we currently have exposure in Singapore and Thailand, but remain cautious about currency risk in Malaysia, Indonesia, and the Philippines.

In general, we still see deflation as the primary global trend, but the battle between inflation and deflation is set to continue over coming months. If oil goes to $30 or even lower, institutional investors such as the sovereign wealth funds of Norway, Abu Dhabi, Kuwait and Saudi Arabia, will have to reduce new equities commitments.

The secondary consequences of the oil price collapse will be felt most acutely in marginal economies with high production costs, such as Venezuela, Colombia, Nigeria, Angola, Iran, the North Sea, and the Canadian Tar Sands. We are likely to see more distress for oil currencies in the coming year.

When the oil price plunged in 1986 to $15, it brought about the fall of the Berlin Wall within three years and the collapse of the Soviet Union within five. There may be similar geopolitical effects this time around, possibly in Saudi Arabia and the Arab world.

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