Yoshikami: China's Emerging Consumers
A great benefit of traveling to Asia is finding out firsthand about conditions in the region. Being here means I have access to other market strategists and industry leaders. The insight gained is invaluable as we help invest client assets.
I have had several interesting discussions today about China and it's prospects for the future. What follows are several insights from these discussions.
China has been an underperforming market for some time now as concerns have been raised about a bubble in real estate and high inflation. These issues have drawn the attention of Chinese central bankers.
Capital levels requirements have been raised, interest rates have been adjusted upwards, and down payment demands continue to rise. Despite these measures, Chinese inflation and real estate values continue to move upward. Additionally, the export sector continues to struggle as economies around the world stagger forward in an uneven recovery.
The naysayers say this surely indicates the end of China and that the lag in export activity will cause the house of cards to come crashing down. Well, not so fast I say. Don't count China out.
While it is clear the Chinese economy is coping with challenges, we still believe in the inherent strength of China's capital growth engine.
Exports will recover (though likely not to the extent experiences pre-2008).
And China has something going for it that is sometimes overlooked; internal consumption is surging faster than most experts expected. Chinese consumption is growing by leaps and bounds and this will help fill the gap left by lower Chinese export levels.
Companies as diverse as McDonald's to Coach to Apple all are seeking to capitalize on China's growing affluence and appetite for goods. One only needs to see the lines outside of luxury stores in Macau to recognize that consumption is the new national pastime for the Chinese.
TVs, watches, second homes, new cars, the latest fashion, and a host of other product categories are all flying off the shelves. Driving down Shanghai's main boulevard is an eye-opening experience. As you pass the Cadillac dealership and see the large Gap store, it becomes clear; the Chinese are ready to consume and businesses are ready to help them satisfy that inclination.
China was a lagging equity market in 2010 because of understandable concerns about the economy. But we believe the pessimists have it wrong by concluding this is a long term condition. We expect China to bounce back with stronger equity returns.
Investors can capitalize on China growth by buying multinational corporations that derive a significant revenue stream from Chinese operations. Additionally, Chinese ETF assets are prevalent and allow for a diversified mix of assets focused on the Chinese economy.
If you invest in ETF assets, be aware that investing in Shanghai is a completely different investment choice than investing in Hong Kong as the sector nature of the constructed ETF's vary greatly. As always, research before you invest.
The next decade will belong to emerging markets in terms of economic growth. The transition has already started and will not slow down as labor cost differentials provide fuel for economic activity. And this activity will lead to greater consumption and more affluence in China, both necessary ingredients for economic growth.
China will be a leading country in the global economy in terms of GDP contribution and it makes sense to participate in that story as you invest in your own portfolio. See how China fits into your strategy.
Michael A. Yoshikami, Ph.D., CFP®, is CEO, Founder, and Chairman of YCMNET’s Investment Committee at YCMNET Advisors, Inc., a registered investment advisory firm. He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org