Month: June 2017

China, the Middle Income Trap and Beyond

Emerging market countries can be categorized according to the level of prosperity achieved by their populations.  Generally, poor countries, with lower GDP per capita, should grow faster than richer countries, as they adopt well-known technologies to boost productivity. Assuming a stable social and political environment and basic legal and economic conditions, high growth, driven by urbanization and basic manufacturing, can be achieved for long periods. India and Indonesia, for example, today are in this “catch-up” phase, growing their GDP at well above average global rates. China has achieved phenomenal growth since it launched economic reforms in the late 1970s, following the path previously taken by its neighbors South Korea, Taiwan and Japan.

However, once middle-income status has been achieved most countries are unable to further reduce the gap with the United States and the other highly developed countries. This is called the “middle-income trap.” Aside for a few city-states (Singapore and Hong Kong) and oil-rich sheikdoms,  few  have broken the trap.  The exceptions may be Taiwan, South Korea and Israel. These three have benefited from a special relationship with the U.S. hegemon and successfully pursued education-intensive, high-tech strategies. On the other hand, some countries regress after reaching middle-income level; Argentina, Venezuela and South Africa are examples of this. Brazil is another worry; it has grown GDP/capita at less than 0.9% per year since its “miracle” came to an end in the late 1970s.

China clearly sees itself following the path of Taiwan and South Korea. Though it will not enjoy U.S. support, some indicators point to good prospects.

For  a middle-income country to sustain high growth it needs to move up the value chain which means higher innovation and productivity, which requires a highly educated workforce. The Global Innovation Index ranks countries in terms of their innovative capacity and has been doing this for 10 years using the same methodology. In its 2017 report, GII highlights the stagnation of middle-income countries in bridging the gap with rich countries, but singles out China as the exception. GII ranks China as the 22nd most innovative economy, closing in on the elite. This compares to its 37th ranking in the 2008 GII report

China’s growing capacity to innovate is confirmed by its increase in patent filings. In fact, according to the World Intellectual Property Organization (WIPO),  in 2016 China filed for over 38% of international patents, surpassing the  United States with 20.4%.

The OECD Program for International Student Assessment (PISA)  evaluations point to China’s spectacular rise in science and technology and give credence to its ambitions. According to the 2015 PISA report, the most developed parts of China, as represented by Beijing-Shanghai-Jiangsu-Guangdong, already score in line with the best Asian performers and well above the United States and European levels, particularly in mathematics.

Chinese policy makers are well aware of the “middle-income trap,” and are determined to avoid it. The legitimacy of the authoritarian political regime to a degree rests on its ability to sustain growth and rising living standards. That is why promoting innovation was given the highest priority in the governments 13th Five-Year Plan for Economic and Social Development, 2016-2020, and a commitment was made to harness resources to achieve breakthroughs in key technologies. The 13th plan goes so far as to specify the technologies that China must dominate and makes an explicit commitment to provide the financial and institutional support to promote success.

 

Us Fed watch:

 

Brazil Watch :

India Watch :

China Watch:

Xi Jinping’s War on Financial Crocodiles (FT)

China and Africa (Mckinsey)

China Technology Watch:

China Shows off New Generation of High-Speed Trains (Caixin)

CRRC Wins Train Supply Deal in Montreal (Caixin)

Chinese Phones Take over Indian Market (SCMP)

Tech Titans in China Take Battle to a New Frontier (Bloomberg)

 

China Consumer Watch:

  • P&G Refocuses Strategy on Premiumisation ( SCMP)

 

Commodity Watch:

  • China Scap Metal Exports Balloon (Caixin)
  • “The mining methods of the past have changed. And where we’re controlling mines from for the future from pit support is located in office buildings instead of the mine sites…I was talking to a customer last week about autonomy and they have a goal to be fully autonomous on every mine site by 2025. And they have thousands of pieces of equipment. So, you’ve got these bold goals being placed out there. So, clearly, the momentum is moving.” —Caterpillar Resource Industries President Denise Johnson (Mining)
  • And this chart from Martin Katusa shows how weak demand and declining production costs lead to low prices, and commodity prices at all-time lows relative to the S&P 500.

  • The Collapse of South Africa’s Mining Sector Valuewalk

Technology Disruption Watch:

Anti-Globalization Watch:

 

Notable Blogs:

 

Notable Quotes:
• “Xi’an only has a little over 40 Starbucks at the moment. This is definitely not enough. I think 400 would be more appropriate.” Wang Yongkank, Party Secretary of Xi’an, as reported by Week in China.
• “The reality is that as a planned economy and with the government having control of the major banks and large companies, a financial crisis is simply not in the cards.” Mark Mobius, Templeton Investments on China.

The Case for Emerging Markets

Warren Buffett and Jorge Paulo Lehman, two of the best investors of the past decades, recently met with students at a conference at the Harvard Business School organized by Brazilian business students. Asked for their opinion on opportunities for investing in emerging markets, both Buffett and Lehman deflected the question, preferring to highlight a preference for the depth and wealth of opportunities available in the United States. “If we’re going to prospect,” Buffett said, “this is a huge, huge market, and if there is something modestly better where I don’t understand the culture that well or the laws of have an acquaintance with the business people and were missing that that doesn’t bother me at all.” “America”, he added, “is a pretty darn good place to invest.”
Should the individual investor follow the advice of the Sage of Omaha? Surely there is wisdom in investing in things that one understands, and the dynamism and diversity of the American capital markets are unsurpassed. Yet, there is a good case for allocating some capital outside the United States.
When Buffett started investing in the 1950s and 1960s the U.S. was a global hegemon with a preponderant economy and matchless capital markets, but today the global economy is increasingly driven by Asia. Aging populations, low productivity growth and high levels of debt in the U.S. and other developed countries point to slower growth than in the past. Younger populations and more opportunities for increasing productivity mean that emerging markets can count on relatively higher economic growth and expanding capital markets. Most of the wealth creation in the world today is being generated in Asia. Many traditional industries, such as oil and electricity, face declining volumes in developed markets, and will rely entirely on emerging markets to sustain any growth.
In addition to providing investors the opportunity to tap into the faster growing economies of the world, Emerging markets provides the investor with some diversification, the only “free lunch” in the investing world.
Notwithstanding Jorge Paulo Lehman’s appreciation for the depth and scale of the U.S. capital markets which he now finds indispensable to deploy the fire-power of 3G Capital, his partnership continues to treasure its Brazilian roots. The beer and food empire which now includes Budweiser and Kraft all started from nothing some 30 years ago in Brazil, and even today the group harnesses the best of Brazilian entrepreneurial creativity and dynamism. After the recent merger of ABInBev and SABMiller, Lehman’s beer juggernaut will have more than half of sales and practically all of its growth generated by its breweries in emerging markets. As Lehman told the Harvard students, though “America is wonderful compared to the rest of the world,” beer is not growing in developed markets, so ABInbev has gone to Africa in “a big way” where “there is a hot climate, young population” that will double from 1 billion to 2 billion in the next thirty years. AbInBev now has six of the top ten best-selling beer brands in China, the largest potential source of earnings growth for the global beer industry in the coming decade, and near-monopolistic positions in the African and Latin American continents.
This blog will explore the opportunities for investing in emerging markets created by entrepreneurs like Jorge Paulo Lehman. It will seek to educate the common investor about the main trends in these markets and explore the controversial issues that affect the investor in emerging markets.

Us Fed watch:
• Ady Barkan sees changes coming at the Fed (Fed Rethink Coming ).
• Ben Hunt on who is master of the FED( Tell My Horse).
• Larry Summers on Why the Fed is making a mistake(Larry Summers)
• Unprecedented valuations of financial assets (The Felder Report).

Emerging Markets Watch :
Bloomberg says BRICS are back in favor. (Bloomberg)

Brazil Watch :
• Brazil’s Argentina Moment Project Syndicate

India Watch :
• A New Emphasis on Gainful Employment In India McKinsey

• India’s PayTM said to seek license to offer money market fund. Bloomberg

China Technology Watch:

• China Shatters “Spooky Action at a Distance” Record, Preps for Quantum Internet  Scientific American

Commodity Watch:
• “The mining methods of the past have changed. And where we’re controlling mines from for the future from pit support is located in office buildings instead of the mine sites…I was talking to a customer last week about autonomy and they have a goal to be fully autonomous on every mine site by 2025. And they have thousands of pieces of equipment. So, you’ve got these bold goals being placed out there. So, clearly, the momentum is moving.” —Caterpillar Resource Industries President Denise Johnson (Mining)
• And this chart from Martin Katusa shows how weak demand and declining production costs lead to low prices, and commodity prices at all-time lows relative to the S&P 500.

• Fear is What Changed Saudi Arabia (WSJ)
• “You go to Asia. You go to Europe. You go to the Middle East. They realize the position of the U.S. in the world is different today because of this change in our energy position. Among other things, the sanctions on Iran would not have worked had it not been for shale, because you could not have replaced the Iranian oil that was taken off the market. And so now instead of just OPEC and non-OPEC, you have the big three. You have Saudi Arabia, you have Russia, and you have a country called the United States.”— Daniel Yergin, vice chairman, IHS Markit (WSJ)
• Measuring Labor Productivity in the Gold Mining Industry S&P Global Market Intelligence
• The Collapse of South Africa’s Mining Sector Valuewalk

Technology Disruption Watch:
• Amazon’s New Customer  Stratechery
• Why Amazon Bought WholeFoods L2

Anti-Globalization Watch:
• Commerce Secretary Wilbur Ross Talks Trade  WSJ

Notable Blogs:
• On My Radar: Investment Ideas — Notes from the 2017 Strategic Investment Conference   CMGwealth
• Peak Stimulus has Passed  CreditBubbleBulletin
• Yardeni on tech valuations Yardeni
• On momentum investing and buying all-time highs. Of dollars and data

Notable Quotes:
• “Xi’an only has a little over 40 Starbucks at the moment. This is definitely not enough. I think 400 would be more appropriate.” Wang Yongkank, Party Secretary of Xi’an, as reported by Week in China.
• “The reality is that as a planned economy and with the government having control of the major banks and large companies, a financial crisis is simply not in the cards.” Mark Mobius, Templeton Investments on China.

Notable Chart from Gavekal Research