China stimulus

The market liked the Politburo statement of support, to aid China’s struggling economy.

I read through the translated statements, and it does seem to be along the following lines

  • The economy is weaker than we’d like
  • We need to do something about it
  • We ask banks to lend more credit, and to treat repayments more kindly
  • We ask private enterprises to accelerate activity
  • We need to think about how to wind up distressed debts in property
  • We need to boost the household share of consumption

That is a good list of goals, but little detail on how to achieve any of it, what it actually means.

The simple and easy thing to do is “just overweight BHP”, or any of the other major Aussie commodity producers, and indeed, that’s what the market has done.

We did not (“just OW BHP”) and whilst we have BHP in the portfolio, we don’t have remotely enough to not wear some underperformance on the trade (BHP is a big index weight, alongside BHP and FMG, other stocks we also don’t own).

The more complex, and seemingly wrong, take from us, is that China has no chance of avoiding the trap Japan fell into, that stimulus (additional spending) in property and fixed asset investment is unproductive, simply adds more debt into the economy, and those unproductive resource allocations take capital away from other sectors that could use it, hence lowering (further!) the long-run rate of growth in an economy that already suffers downside pressures to growth given adverse demographics (growing old).

Stimulus merely buys a little time, and momentarily adds a little more juice, but only worsens the issue.

And so, we don’t chase the commodity names.

In our multi-asset portfolios, this isn’t so bad. When the commodity stocks run, the AUD tends to rise, the global growth backdrop briefly strengthens, and so our hedged international equity and growth-oriented exposures do well.

In our Australian equity managed fund sleeves, we also hold up okay, given that some of our managers have quite a chunky materials exposure.

But in our direct equity sleeves, we don’t have much commodities on, despite owning stocks like BHP, AWC and IPL, there’s not enough in size.

We’ve been through those cycles at least 5 times since 2015, and continue to think that a) commodities predicated on China won’t work b) that companies like BHP and RIO are over-earning (so no need to overweight iron ore or steel) c) that in the long-run human ingenuity overcomes most supply shortages through additional reserve discoveries or through technological substitution, and so shortages in copper and lithium will not endure.

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