The big unknown and what does it mean for us?
By Bruce McLachlan, Chief Executive
05 October, 2017
Ever wondered why many so called experts have been getting forward looking predictions so wrong in recent times? It’s because most predictions and forecasts rely on learnings or analysis of our collective experiences from the past. And the world has never been in a phase like it is right now, which means much of this analysis and past experience is, well......useless.
There has been technology impacts, quantitative easing, sub-zero interest rates, all at an eye watering rate of change....there are lots of reasons why predicting the future has become difficult. Yet it remains popular as humans are innately programmed to make sense of the world around us.
But then there is China. Even the most accomplished experts have very little genuine understanding of the intricacies of the Chinese economy, and it’s precise impact on the world. Decoding China could provide insight into the future for global markets due the sheer scale of the China influence. You see size is at the heart of what makes China so different, their differing political and economic models are merely red herrings. China is the clear second largest economy in the world, and since introducing market reforms in 1978 has grown at an average 10% since that time, and 7% pa in more recent times. The China economy is bigger than Germany, Japan and the UK combined, which are the third to fifth largest economies in the world. Bloomberg reports that total capital outflows from China in a single year over 2015/2016 amounted to $1.7 trillion US dollars. These dollars have poured into equity markets, property and direct acquisition of companies in every sphere of the world economy. This has distorted traditional valuation methodology and markets almost everywhere. And very few other than the Chinese themselves really understand what is happening, or whether it will endure.
In New Zealand the commentary of what a change in levels of investment from China in New Zealand property and equities might mean is laden with fear. So what is the reality for New Zealand investors? First, there is added competition to buy assets, particularly those deemed to be strategic. Second, the Chinese have proven in many instances to take very long term perspectives, and therefore will value these strategic assets in a way not replicated by many westerners. Thirdly, the New Zealand Overseas Investment Office reports that in the first 8 months of this year foreigners acquired a total of $2.7b of New Zealand assets. This is from all countries and confirms that New Zealand represents the proverbial drop in the bucket to the $1.7 trillion USD annual capital outflows emanating from China. Therefore investors, rather than worrying what a reduction in Chinese investment might mean for markets, should be conscious that a slight redirection of additional capital towards New Zealand could have dramatically more impact than what we have witnessed to date.
The lesson here is to not try and second guess the Chinese impact, the political response, nor try to get rich quick. Investment fundamentals do not require a prediction of the future, nor a following of that which is fashionable. That is called speculation. Buying quality assets at fair prices and holding for the longer term may not sound exciting, but is bound to minimise disappointments in the future. And do be careful who you get your expert advice from.