August 2023
China's economy has been growing at a high rate of almost double digits or high single digits for the past 20-25 years, mainly driven by investment and infrastructure projects. However, now that China has reached late-stage urbanization, their economic growth is slowing due to several headwinds like high unemployment rates, government debt and a smaller population of young people.
As China decelerates, Sasan suspects the next emerging economy that will dominate the global market is India. They have a well-educated, young population that is quickly growing. Furthermore, Sasan says the Indian government wants to create an environment that is pro-business, which China has not always fostered.
Finally, as an investor, considering a well-diversified portfolio with a focus on global opportunities, particularly in natural resources, can be a prudent strategy given the macro factors of globalization and decarbonization.
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Good morning and welcome to another episode of THE FINANCIAL COMMUTE. I am your guest host Mike Rudow. Chris Galeski will not be joining us because he is chasing around a little white ball. But to join me as a guest we have Sasan Faiz. Sasan is the Managing Director of Investments at Morton. Well, Sasan, thank you for joining me.
Thanks for having me. Right.
It’s been a pleasure to watch you guest on the show. I always enjoy your episode, so I'm excited to be able to host it with you on board today. We wanted to talk about China, right? We've seen a lot of headlines in the news about the slowing growth in China's economy, whether it's The Washington Post, Bloomberg and New York Times.
I've had clients that have reached out to me if they should be concerned about that. So I thought we would take some time today and just talk about the impact of of a slowing growth economy in China. And to put it in perspective for the viewers, I think GDP growth is expected at about 5% in China this year.
Global growth is expected to be just under 3%, about 2.8%. Is that right? So 5% to 2.8% doesn't seem like that's that big of a deal. But when you when you peel that back a little bit, China was in a zero coverage environment. Sure, they were still under lockdown. So if you net that 5%, it's only really about a 3% growth that we're looking at.
And if you look at pre-COVID levels, which I think we're going to get into in a little bit, there were at seven plus percent for years with a projection to, you know, exceed the U.S. economy by 2030. So there is some things to unpack there. And, you know, there's no better person talk to you about that.
Or things, right? Yeah, that was a great introduction. I just want to maybe go back a little bit and talk about that Maybe over the past 20, 25 years or so, as you mentioned, China has been growing almost double digits or high single digits and the economy was more investment and infrastructure focused. So there was a lot of buildings going on and China was more of a cheap neighbor for the rest of the world.
China has been trying to kind of shift its economy more to a consumption base, so basically a Western model. So when you're looking at for example, the U.S. economy, 70% of our economy is based on consumption. So U.S. consumer spending, yeah, China, for example, is mourning the 35 to 40% range. So as China was building infrastructure and now they're getting into kind of a late stage urbanization phase and they don't need to grow their economy the way it used to.
So a lot of stimulus that used to coming to the economy is no longer needed. And China has a very high savings rate. It's almost 45%. So it's about 35% of the consumer side and 10% on the corporate side versus the U.S., which is about 20%. One reason why that money is not moving in to the economy and moving into consumption is that China's capital markets are not as well-developed as the U.S. So in the U.S., we are investing the 41 KS and equities.
And so for almost 50% of our savings goes into the equity market where this option is not available. So as you mentioned that China's economy just reported to about 6.1% growth for the second quarter, but you pointed out that they're coming from a zero COVID environment where almost most of the economy was shut down. So expectations was for almost 7%.
And the IMF, the International Monetary Fund, says China’s growing about 5 to 5, 2 to 5.2% range this year. So there are a lot of headwinds for China as far as the economy is concerned. But also there are some positive side that we can take as well. Yeah.
I mean, I'd love to hear about the positives and I'm not by any means, you know, against China. I think there's a lot of opportunity in in China and other underdeveloped nations. But when you look at the headwinds, it's kind of overwhelming. I mean, if you look at just their demographics, you've got 20% or more of the younger generation unemployed.
Right. And that's a big number. That's three times, four times, you know, the average in other developed and underdeveloped countries, you've got a ton of debt. And local governments, I mean, similar to the U.S., you've got a ton of debt in the real estate sector and debt can be toxic. And you've got, you know, multiple headwinds coming at you at the same time with that, you've got a shrinking economy in the sense that there are fewer young people than there are old people.
Right. And as far as GDP goes, we need, you know, a growing population for GDP consumption.
Those are definitely the I think, major concerns that you're mentioning. They're very valid, all of them, especially the demographics. That's a negative for China. It's also negative for most of the developed nations. So the headwinds are there. As far as the valuations in the capital markets are concerned, valuations are fairly reasonable. So for example, if you look at the MSCI China equity market, it's sitting at about 1.1 times sales and 1.1 times book value.
So a lot of the these headwinds, a lot of these negatives, I think they are already priced into the markets. So when looking at it, I thought about maybe there are some positives. So the fact it's mainly on the valuations, I think that points about headwinds on the economy is are very valid but has the market already priced those in.
And there was also the kind of risk factor that is geopolitics right there when China's Communist Party kind of gets into the business of companies and tries to tell them how they should allocate capital. And also there are geopolitical tensions with the U.S. where we had Secretary Yellen and Secretary Blinken recently traveled to China to kind of, uh, calm down those tensions.
And I think that the government there is starting to project an image that's more positive for businesses. I think those are some positive signals that we're seeing. So some of the headwinds are there, there are some positive developments- valuations are reasonable. So I don't think we want to kind of look at the valuations as a turning point and in your market doing better necessarily.
But I think there are some positives that are going to kind of negate the headwinds that you mentioned.
But it's interesting when you talk about that, but when you look at China specifically, we might have seen the market forward looking and see some opportunity for lower valuations and maybe a good opportunity to buy in. But what about the impact of of China globally when you look at other under underdeveloped nations like Australia like Brazil, right.
These are countries that are heavy with exporting material goods and China's manufacturing is is the number one buyer of those materials. And as they pullback in manufacturing, as we're seeing month over month, China with slowing manufacturing, how is that going to impact development in the other countries and investing?
I think that's a that's a huge factor. As you mentioned, China is now the second largest economy in the world, so they are a tremendous user of raw materials, energy and other materials. And Brazil, for example, as you mentioned, that's a big exporter. So as China slows down, I think that has a huge impact on the global economy.
You got IMF, the International Monetary Fund just came out with the global growth projections for this year, about 2.8 to 3%. As you mentioned, China is starting to slow down. So about 5% this year, going to about four and a half percent next year. So I think the next emerging economy that's going to be dominating over the next maybe ten years or so is really India.
India, a contrast to China, has a much younger population. So population growth is very positive. India also has a very well-educated population, very, very good in technology and engineering. And a lot of people think that just population growth and just the demographics is positive is going to be a kind of making India the next China or the next maybe 20 years or so.
It is interesting. I mean, I know China had a large part of their young population working for these big tech companies, making good livings. And, you know, the government stepped in and did a regulation on big tech and it pulled away a lot of the opportunity for the younger generation. Is it possible that India has something that comes like that?
Is that ever a concern when you look at comparing the two economies?
Yeah, I think India is the largest democracy in the world. So I think the government is very positive on developing businesses and so forth. When you look at China with the giant Chinese Communist Party, I think there's always that risk, regulatory risk, also geopolitical risk that that's not present when you look at India. So I think India has some benefits there.
India’s government is really pro-business and China has not always been that way. And you always cannot read what the Chinese Communist Party wants to do.
So from an investor standpoint, when you see headlines like this with, you know, China's GDP shrinking, you're saying that, you know, there are some headwinds, there's definitely some things to be worried about, but there's also opportunity because the market's forward looking, it's pricing in these opportunities. Are there any other things that we should be looking out for as an investor when we see these headlines, when we think about the changing landscape and the fundamentals in China's economy and the possibilities of, you know, growing India?
Yeah, absolutely. I think, you know, we're very invested in a well-diversified portfolio globally, So we don't have an all the way to China, for example, that we just I think that that's a that's a good idea at this point. But what we are very invested in China, the same as what the global equity markets are invested at, the same weight and opportunities that we see right now going forward are more in the international markets and also in that what would be kind of the two big macro factors that we've talked about in the past are globalization and decarbonization.
Inflation going forward is going to be the higher regime than we've had in the past 15 years that's going to be positive for natural resource type companies, as we see. And you drive on the freeway, you see so many Teslas and kind of shift toward renewable energy. Electric vehicles is going to be positive for industrial metals, and that's going to be a lot of kind of pricing pressure on those type of commodities and the companies that are involved in producing and processing industrial metals.
We think they're going to be affecting over the next five years or so. So the areas that we're concerned about are more in the natural resources space, everything that there is actually a tailwind to benefit those kind of companies.
Yeah, absolutely. I think investing in natural resources, right, Finite objects, things that, you know, you can't just produce more when you want to.
Well, Sasan, thank you so much for your wisdom, your input. I thought that was a wonderful conversation and very enlightening about the things to look out for as far as growth in China's economy, opportunities in underdeveloped and international markets. I think as we've seen, you know, the market prices in all of the available information and there are a lot of international stocks and opportunities that we see trading in a more favorable valuation.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
