China’s third-quarter GDP figure released this morning was highly encouraging at 6.7% year-on-year and 1.8% quarter-on-quarter, and the 6.1% reading for industrial production and 10.7% growth in retail sales were also pretty impressive. How nice is that?
But hang on, every single figure was within 0.1 percentage point of the ones we were presented with for the previous period! So they’re telling us that the trajectory is absolutely linear? The last time we all fell for that kind of consistency was when Bernie Madoff sent out the performance numbers on his funds. Can any economy, China’s included, really perform like that?
Of course it can’t. So let’s cut through the fabricated releases and try to work out what the Chinese authorities are trying to tell us. My guess is that Beijing has now appreciated that the debt-fuelled race for growth will end in tears and that the time has come to change down by one gear. The economy can probably grow sustainably at around 5%-5.5% without pumping silly amounts of credit into it. If the powers that be can gently ratchet down expectations, it can most probably avoid a hard landing.
My old friend Alex Moffatt of Joseph Palmer & Sons in Melbourne pointed out this morning that 6.7% might not be 7.5% but it is still pretty significant growth in absolute numbers. In fact at that rate, compounded, the economy will double in size again within 10 years. That is barely sustainable and therefore we will have to, at some point, lower our expectations. The fall in the yuan, not entirely engineered by the PBoC, seems to reflect an actual net outflow of capital from China and into other markets, which must display a sense that even local investors are growing a little fearful of a correction.
Chinese asset markets are flat on the day although I would not be at all surprised to see Europe continue the rally of yesterday after heaving a sigh of relief that China is still chugging along happily. Whether the fact that Q3 figures are carbon copies (who out there remembers what a carbon copy is?) of Q2 figures, and hence utterly unbelievable, is an entirely different matter. The message, however, is clear and it has to be that the authorities know which side is up and that they have begun the process of gently repositioning themselves accordingly.
Taking stock
Moff and I also talked a bit about where to put money. Bond yields are rising and it takes either a brave or a foolish investor to aggressively buy into a market which has “negative total return expected” printed on the packaging. This rising yield scenario will also negatively affect interest rate-sensitive sectors of the stock market, foremost of which are infrastructure players and utilities. Let’s face it, many of these are just bonds in disguise. If at the same time growth is slowing – not reversing, just slowing – then the attraction of cyclical stocks also fades a bit. At the same time, old staples like pharma and healthcare have a fear of a Clinton victory hanging over them and energy, having been the biggest game in town for the past nine months, looks more like a reduce than an add. That leaves tech, but can one trust a sector that has just seen Netflix rally by 20% in a day to a P/E ratio of 321 times?
Choices are hard for anybody who cares to think really hard about what to do next, or it seems it to those who invest in broad brush strokes. Stock pickers have been out of favour for a long time – never mind the fundamentals, trade the correlation! – but perhaps the time has come to really dig deeper, to work a bit harder and to reap the rewards for skill and experience. I have one dear lady friend with whom I share a hobby – not what you’re thinking! – who runs the research department of a small equity boutique in London. She bemoans how hard her firm is struggling to get paid for its work. Investing is not a computer game and it is not a game that can be won by clever algorithms alone. Is Basel IV, while we’re on the subject, anything more than just another algorithm?
Back in reporting land, Goldman Sachs once again knocked the cover off the ball, as did UnitedHealth while Johnson & Johnson and BlackRock both met and slightly exceeded forecasts. The techies also looked good. Both the Dow and the S&P stopped the rot and my guess is that we’ll see stock markets generally higher in two weeks’ time than they are now. By then we’ll be close to the election date and history has seen a post-election rally, irrespective of who wins. I think it might be a case of buy now to avoid disappointment later.
29-year anniversary
With respect to this fateful date and the events that unfolded on Monday, October 19 1987, even with the 30th anniversary with us next year, its relevance can be confined to history. With 10-year Treasury yields at 10.2% two days before the crash and still at 8.9% two days after, investors had an alternative; with the current yield at 1.75% they don’t. I rest my case.
I was once again perplexed to hear another European grandee bemoan that the British are seemingly sailing into Brexit with no clue as to what to do next. May I humbly point out that Article 50 is in their rules and they enshrined it in there without ever having considered how to deal with it, should it ever be triggered. The deeply embedded propensity of Brussels to sit back when it finds a tricky problem, to close its eyes and to hope that sooner or later, if it keeps them closed for long enough, it will go away is precisely why I, for one, voted to leave. Have I heard one word yet of how it proposes to deal with a loss of 10% of its budget and its second or third-largest net contributor? We might be confused over here but at least we’re talking…