The trouble with Chinese food – so the cliché goes – is that, half an hour later, you’re hungry again. Much the same can be said of Chinese food for thought. No sooner had I digested last week’s menu of trading volumes and consumer debt levels, than I found myself craving another portion of economic monosodium glutamate. And, as is the case in the Jade Garden on a Monday night, I didn’t have to wait very long.
Earlier this week, Barclays Wealth served up the latest issue of its Compass strategy paper, salivating over the fact that “emerging markets are returning to growth, most notably in China”. Numbers came thick and fast: Chinese GDP growth is on track to hit 8 per cent for 2009; exports from emerging Asia to China account for more than 22 per cent of the total; and Chinese loans are growing at 35 per cent year on year.
On the day before, Merrill Lynch Wealth Management issued a mild health warning over “the potential for an upset” if Chinese policymakers curb this lending. But, before reaching for the Rennies, it concluded: “There appears little appetite for that.”
Then, a few days later, I took delivery of a “new world economic order” – in the form of a new book by Bryan Collings, manager of the Ignis International HEXAM Global Emerging Markets Fund. This order contained more numbers: China’s workforce will grow by 22.7m in the next ten years; it now has 7,000 steel factories, double the number in 2002; it will invest $9.3 trillion in infrastructure between 2008 and 2017; and it has pushed world soy oil usage up from 15m metric tons in 1990 to 36m tons in 2008. That’s a lot of soy.
So we all become shareholders in Kikkoman (code: 2801, Tokyo Stock Exchange) and grow as rich as its sauce, right? Unfortunately, the recipe is not so simple, as two eminent analysts have just pointed out.
Paul Marson, the former Bank of England economist and chief investment officer for Goldman Sachs Wealth Management, has just completed some research on emerging markets for his new employer, Lombard Odier. He studied stock market performance and real GDP in emerging markets between 1976 and 2005, and found absolutely no correlation between economic growth and equity total returns.
“Everyone is going on about growth,” he says, “and how the people in emerging markets are going to buy fridges and washing machines. Brazilians, Russians, and Chinese will benefit – but investors will not.” He attributes this to a factor many ignore: financing. Companies financing from internally retained funds will benefit themselves, rather than shareholders. Companies financing from externally gained funds will dilute their shareholders. So investors will finance the workers’ white goods.
Elroy Dimson of the London Business School of Business said as much to the Citywire Wealth Manager forum a few weeks ago: high growth in emerging markets has not led to high returns over a prolonged period.
Investors must therefore ignore economic growth and focus on valuation numbers, argues Marson. “Latin Amercia performed because it was very, very cheap,” he says. Former prime minister Clement Atlee understood this. As he put it: “I just love Chinese food. My favourite dish is number 27.”
matthew.vincent@ft.com
