I wrote lastweek that for all the mutterings about booms and bubbles in China, it might actually be one of the best buys in the world at the moment. This view was met with a fair amount of sniffy scoffing from most mainstream analysts. They may be quite right in their sniffiness, but I was pleased to see a supporting view come out today from boutique research firm GavKal.
Right now, they say, it is "fashionable to make fun of China's roaring equity bull market by highlighting that it is driven by retail punters who care little for valuations, business strategies or management quality." But to look at it like this is to rather miss the point.
I have pointed out the parallels between the Japan of the 1970s and 1980s and the China of today several times before, but GavKal make another point on the matter. They see the "single most important long-term financial development" globally as the internationalisation of the renminbi, a process that "is now going into overdrive" given that the International Monetary Fund (IMF) is soon to vote for renminbi to become a special drawing rights currency.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
This could be seen to neatly parallel the liberalisation of the yen after 1980: it was made fully convertible, a change that pulled hugely underweight global investors into Japan and was one of the main drivers of the decade-long bull market that ended with seven of the top ten firms by market cap in the world being Japanese banks.
Move on to today and it is hard not to see the same happening with China. Right now its equities make up 0% of the World MSCI index and 1.7% of the MSCI All-Countries index. Ask any fund manager and he will tell you that he gets his exposure to China via global firms that do business there rather than from firms listed there.China may account for 15% of global GDP, but its companies make up an "inconsequential part" of most institutional portfolios.
But if renminbi usage grows further (it is already the fifth most used currency in Swift (Society for Worldwide Interbank Financial Telecommunication) settlements), China begins to embrace currency deregulation, and as a result, all index providers are forced to upgrade China's weight in global indices, "the wave of 'forced buying' of Chinese equities could end up being a tidal wave which sweeps away the very idea of index investing".
Right now, everyone outside of a few Chinese retail investors, everyone is "short/massively underweight China", or at the very least will be once global bond and equity indices start to reflect the reality of a China more open to foreign investment flows. That can't last.
-
Barclays bank caps in-branch cash deposits for personal banking customersNews Barclays has placed a cap on how much you can pay into your bank with cash in a bid to fight financial crime - will you be affected?
-
State pension warning as families opting out of child benefit hits record highUp to one million parents could be losing out on £6,500 in retirement because they have opted out of receiving child benefit.
-
House prices to crash? Your house may still be making you money, but not for much longerOpinion If you’re relying on your property to fund your pension, you may have to think again. But, says Merryn Somerset Webb, if house prices start to fall there may be a silver lining.
-
Prepare your portfolio for recessionOpinion A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, says Merryn Somerset Webb.
-
Investing for income? Here are six investment trusts to buy nowOpinion For many savers and investors, income is getting hard to find. But it's not impossible to find, says Merryn Somerset Webb. Here, she picks six investment trusts that are currently yielding more than 4%.
-
Stories are great – but investors should stick to realityOpinion Everybody loves a story – and investors are no exception. But it’s easy to get carried away, says Merryn Somerset Webb, and forget the underlying truth of the market.
-
Everything is collapsing at once – here’s what to do about itOpinion Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect their wealth.
-
Value is starting to emerge in the marketsOpinion If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy traditionally expensive growth stocks on the cheap, too.
-
ESG investing could end up being a classic mistakeOpinion ESG investing has been embraced with enormous speed and zeal. But think long and hard before buying in, says Merryn Somerset Webb.
-
UK house prices will fall – but not for a few yearsOpinion UK house prices look out of reach for many. But the truth is that British property is surprisingly affordable, says Merryn Somerset Webb. Prices will fall at some point – but not yet.
