Coffee proxy

 

“Short-term market gyrations, however, should not be confused with actions that will lead to long-term sustainable economic gain, especially as China moves to a consumer driven economy. I strongly believe that the Chinese government’s commitment to true economic reform is genuine and that its goal of doubling 2010 per capita income by 2021 resulting in a middle-class in China approaching 600 million Chinese people, or almost twice the size of the entire current U.S. population, is attainable.”


 

To market to market to buy a fat pig China, negative rates, rallying oil prices, banks trading at huge discounts to book (in Europe, not here), banks perhaps having to recapitalise in Europe, negative economic activity in Japan, there often at points in equity markets is very little to stand up and be positive about. Recession indicators globally are getting the chattering classes to be “on watch”, although you know the old snide remark, made by American Economist Paul Samuelson: “Wall Street indexes predicted nine out of the last five recessions!” What Samuelson means is that markets are not very good at predicting an economic downturn. Efficient market theory? Samuelson subscribed to Keynesian economics. Keynes’ teachings, as they say in the classics, is not everyone’s cup of tea.

Jeff Gundlach, perhaps the bond king, (perhaps Winnie the pooh, who is a bear) released a set of charts yesterday which suggest that negative rates are bad for the world, and equally, most importantly in his opinion there is no recession in the US on the cards. He uses the employment data or more accurately, the unemployment rate as an indicator. A flat unemployment rate (as we have seen), coupled with a rising participation rate means more people are participating in the US economy. Which means that there is little chance of a recession, in his opinion.

Again what puzzles me always is the disbelief of the Chinese authorities and their figures. Gundlach suggests that Chinese growth may well be flat. Gundlach then goes on to connect dots and say that if the Chinese data is incorrect, then a lot of global growth forecasts might well hinge on whether or not the outlook should be brighter or not. I often think this China scepticism is unfounded, we are happy and comfortable to believe the Greek data of yesteryear, China however, whoa, we can’t believe that!

Nike last year in their annual report said that they saw 18 percent growth in their revenues in mainland China. Tencent revenues as at their last results release (November last year) saw revenues grow by 34 percent. Admittedly in January, Yum Brands (the owner of Pizza Hut and KFC) said that their Chinese sales for the fourth quarter, same store sales, grew by only two percent. There were some health issues with their chicken. Caterpillar talked about the weakness in China in detail in their last set of results. In mainland China, Richemont grew sales at 13 percent at constant currencies, obviously Hong Kong has been a big concern though for that business.

Again, Starbucks (with Yum) expect flat growth from their China/Asia Pacific business this year, that includes Japan, however, a laggard. Howard Schultz did say a few interesting things on the last results conference call, about that territory (courtesy SeekingAlpha – CEO Howard Schultz on Q1 2016):

“Short-term market gyrations, however, should not be confused with actions that will lead to long-term sustainable economic gain, especially as China moves to a consumer driven economy. I strongly believe that the Chinese government’s commitment to true economic reform is genuine and that its goal of doubling 2010 per capita income by 2021 resulting in a middle-class in China approaching 600 million Chinese people, or almost twice the size of the entire current U.S. population, is attainable.”

 

It seems almost impossible to achieve that in such a short space of time, bearing in mind that this is the same country that experienced the worst famine of all time, not so long ago. The Great Chinese Famine could have accounted for up to 70 odd million lives lost, ending in 1961. Fast forward five to six decades and the Chinese government with their push to consumer focused spend means real changes.

Away from a building economy and more towards a consumer related economy, one where services and urban dwelling is more important. It was only in 2010 that the Chinese population clicked over from more people in the rural areas to more people in urban areas. By contrast, the urbanisation rate here in South Africa according to the world bank is 64 percent. In the United States it is 81 percent, in Germany it is 75 percent, in places like Sweden it is 86 percent. In Japan it is 93 percent, heck in North Korea it is 61 percent, their Southern brothers and sisters have an urbanisation rate of 82 percent. I think what I am trying to say is that I agree with Howard Schultz of Starbucks, in which he says:

“As you know, China has been in the news a great deal lately. As a CEO that’s traveled to China repeatedly over the last ten years, perhaps more than any other American CEO, I have a unique perspective to share. First, let me say that China is here to stay. The buffering that the Chinese economy is taking during today’s period of transition is necessary for it to move on its next stage of development.”

 

China is here to stay, he is right, they are hardly going back to a time of the Great Leaps Backwards. Something has been set in motion, it is certainly not perfect (an authoritarian bunch of leaders are still in charge), it works, however. India may well be the next big consumer of raw materials, their situation again is unique, trickier than China in fact. I would much rather be invested in consumer and services related businesses that are in that territory than a supplier of raw materials. We are well placed for that in our portfolios.

A quick look at markets, stocks slipped away off their best levels last evening in New York, New York, away with oil prices. This close correlation is eating me up a little, I shouldn’t be like that, it is what it is. Don’t fight the tape they say. At the end of the session, the broader markets, the S&P 500 fell 1.1 percent, the Dow Industrials lost two-thirds of a percent and the nerds of NASDAQ lost one and one-quarter of a percent. Materials and energy stocks were slammed, down around 4 percent at the worst.

Locally stocks were very mixed, it was weird. The FirstRand results were received poorly, the stock was down over seven percent by the close. Richemont was at the top end of the bourse, at least in the big caps, boosted by something unusual happening at Burberry. The FT reports Burberry mystery stakeholder spurs speculation about takeover. Weird, someone has taken a 5 percent stake in Burberry, the company hiring folks to thwart potential suitors. Over two years the stock is flat. I am pretty sure that there are some shareholders who are getting impatient, as most investors do! At the end of the local session, stocks closed down four-fifths of a percent. Expect some slippage today too.


 

Linkfest, lap it up

This link takes you to a map that shows how global population ages are going to change going forward until 2060, note how people are living longer – World mean ages. From an investment point of view, healthcare is one sector that is in s sweet spot to take advantage of the trend.

The FT takes a look at the contentious issue of executives using company jets for personal use – Free flights on the company plane. Getting on the house trips in the corporate jet doesn’t help improve the image of corporate excess and global inequality. Both are hot topics globally at the moment.

It is good to see companies also going the solar routeSolar City Spikes After Winning Solar Panel Deal With Whole Foods.

MTN has a 33% stake in this companyHow AIG became Africa’s first billion-dollar e-commerce giant after overhauling its management. There is huge growth potential for the company but it may be slow due lack of infrastructure.


 

Home again, home again, jiggety-jog. Stocks across to the East are looking ropey, off the worst levels of the day. Shanghai markets are down over two percent, Hong Kong stocks are down over one-third of a percent and lastly, Japanese stocks have slipped over four-fifths of a percent. The only thing that could make this day better is if we managed to beat the Aussies convincingly in Cape town, the weather looks superb. Not so here, we desperately need the rain though.


Sent to you by Sasha and Michael on behalf of team Vestact.

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