This week our Global Equity Growth Portfolio investment manager Calamos Investments, talks about China and its current consumption patterns as well as the impact on its industry.
China is a topic that we’ve talked about a lot over the last few years and typically that has been the emerging markets story. It’s a very complicated situation. At a high level, our thesis remains that this is an economy that is transitioning from more of an investment-led, investment-driven economy to more of a balanced economy with more consumption driving growth. This isn’t an easy process.
There was a significant infrastructure investment plan that occurred through 2009. This created a lot of good assets that should provide sustainable growth for the economy going forward as we grow into those assets. But it also added a lot of levers to the system and an additional risk. There are definitely tailwinds there but we’ve also got those headwinds at the higher credit level. We monitor the data that’s coming out of China on a daily and weekly basis. As shown in the diagram below, J.P. Morgan does a good job of aggregating that data and creating a heat map. They’ve bifurcated it to show the consumption drivers in the top section and the industrial drivers of the economy in the bottom section. Green is positive, yellow is stabilization, and red is some weakness. You can see that over the last couple of years there has been growth or stability in most of the consumption-led portions of the economy where, to the contrary, you’re seeing an overall shrinking of the industrial portion of the economy. This isn’t an easy process, and getting the timing right where one portion of your economy is shrinking while the other part is growing is difficult. But our exposure is much more focused on this consumption base, and therefore, we’ve had these positive tailwinds for years in our positioning and think we will continue to do so. I feel oftentimes the media covers a lot of the industrial figures but doesn’t talk about the growthier elements of China and where the opportunities are.
China is a topic that we’ve talked about a lot over the last few years and typically that has been the emerging markets story. It’s a very complicated situation. At a high level, our thesis remains that this is an economy that is transitioning from more of an investment-led, investment-driven economy to more of a balanced economy with more consumption driving growth. This isn’t an easy process.
There was a significant infrastructure investment plan that occurred through 2009. This created a lot of good assets that should provide sustainable growth for the economy going forward as we grow into those assets. But it also added a lot of levers to the system and an additional risk. There are definitely tailwinds there but we’ve also got those headwinds at the higher credit level. We monitor the data that’s coming out of China on a daily and weekly basis. As shown in the diagram below, J.P. Morgan does a good job of aggregating that data and creating a heat map. They’ve bifurcated it to show the consumption drivers in the top section and the industrial drivers of the economy in the bottom section. Green is positive, yellow is stabilization, and red is some weakness. You can see that over the last couple of years there has been growth or stability in most of the consumption-led portions of the economy where, to the contrary, you’re seeing an overall shrinking of the industrial portion of the economy. This isn’t an easy process, and getting the timing right where one portion of your economy is shrinking while the other part is growing is difficult. But our exposure is much more focused on this consumption base, and therefore, we’ve had these positive tailwinds for years in our positioning and think we will continue to do so. I feel oftentimes the media covers a lot of the industrial figures but doesn’t talk about the growthier elements of China and where the opportunities are.
A couple of data points I want to highlight here: Look at the number of delivered packages on the heat map. You can see that’s a figure that’s consistently grown at very high rates. And what that’s showing us, we think, is the growth in e-commerce. We are positioned with a lot of Chinese e-commerce exposure. And as you can see, that’s been a very healthy segment of the overall Chinese economy. Also, passenger vehicle sales—that’s something that we’ve seen an increase in more recently. China has implemented a lot of stimulus over the last six to nine months and we’re starting to see that slowly work its way through the system. And just recently we’ve started to see a pick up in residential starts. They’ve relaxed some policy around that, and therefore, that should be a positive driver of the economy over the next few months as that continues to develop. There are also some numbers that we’re a little more cautious on, such as the increase in steel production. We talked about some of the pull we think is going on there, as well as this big ramp in excavator sales. We followed up with some Japanese suppliers, and we feel like this might be more of a pull forward.
In next weeks investment letter we will continue the discussion around China with a discussion on their major step forward as an economic power house as well as the creation of a significant piece of infrastructure in their one belt, one road initiative.
Happy investing,
The team at TAMIM
Happy investing,
The team at TAMIM
