Summer doldrums…then what?”
Usually May and the summer months of the Northern Hemisphere are seasonally the cruellest of months for the investor. Unfortunately it seems that this year is conforming to the customary script, and thus we thought it appropriate to update our investors of our current thinking and action in the emerging giants of China and India.
We last wrote at the end of March, when we spelt out the case for a more positive stance on China. We felt the market pessimism that China was overheating was getting overdone, and that by mid-year inflation should start subsiding. We still maintain this view, but in the meantime the market has completed a 180 degrees turn and is now fretting that China is in serious danger of over-cooling! We have been saying for some time now that the world has a schizophrenic view of China - it is either too hot, too cold but very rarely just the right temperature…
Recent data does indeed support the view that activity in a number of key sectors is slowing. In addition the well reported issues of electricity brownouts in large tracts of China are certainly adding to concerns, as well as China suffering its worst drought since the 1960’s. Whilst we think it is still likely we might get one or two more interest rate rises and Reserve Requirement increases, we believe tightening in China is pretty much complete. The next inflation print will likely test the 6% level, which may well cause a few jitters, but from then on we believe the inflation issue should ease. But we do not believe that China is in danger of over-tightening just yet. One of the advantages of the Chinese system is that the policymakers/central bankers who arguably over-tightened in 2007/8 are still in place today, and are acutely aware of the dangers of leaving policy too tight for too long.
“We have been saying for some time now that the world has a schizophrenic view of China - it is either too hot, too cold but very rarely just the right temperature…”
In the meantime, price-action in the markets has pushed Chinese equities lower. As Warren Buffet said, “Price is what you pay, value is what you get”, Chinese equities are looking cheap. Whilst we are not in the game of predicting market bottoms, we think we are nearing a turning point with the catalyst being policy loosening.
And so to India, a market that we have been structurally underweight for some time. Our concerns with India mainly centre on inflation, which is much more of a problem than in China. With India’s fiscal deficit one of the largest in Asia, and with the government continuing to subsidise the price of many Hot Topic – China & India 26 May 2011
essential commodities, the recent rise in commodity prices has been nothing short of a disaster. In addition India has been undergoing monetary tightening since the beginning of 2010, and the latest surprise 0.5% interest rate increase has left the impression that the RBI is desperately trying to get ahead of the curve. We would also add that the much publicised corruption cases dominating the headlines have certainly caused disruption to many government departments, delaying essential reforms and infrastructure projects.
Wow, that’s a fairly large dose of bad news! But there is some good news. The good news is that the market has been discounting these concerns for quite some time, and has fallen nearly 10% from its recent April high. Whilst India is certainly not yet cheap in comparison to other emerging markets, we are finding plenty of individual stocks that have de-rated by a considerably larger degree than the market and are undoubtedly looking cheap. Again we will not try to predict the market bottom, and for choice we still feel there are further downside risks from foreign selling, but for any genuine long term investor we believe India is becoming enticing again. Add the recent fall in commodity prices and a catalyst begins to come to mind.
In fact as a reflection of these views we have begun to gradually increase our India weights in our Chindia portfolio. Ultimately we would anticipate the portfolio being back to a more neutral 50:50 weighting between China and India in the next few months, and that after suffering an extended period in the doldrums, both markets should post better performance into the final few months of 2011.
