While all high-growth markets, such as many emerging markets, tend to disappoint equity market investors over long periods, China is a standout, according to Gerard Minack. The country is ‘the world’s best practice dilutor” of capital, he says.
It’s the dilution of share capital, because of China’s allocation of capital through high levels of investment, which is the key problem for investors, he told a webinar targeting an Australian audience organised by New York-based ETF and mutual fund company Van Eck last week (February 3).
Minack, a former chief economist and investment analyst at Morgan Stanley and popular newspaper and television commentator, provided an investor’s reality check to the economic and political outlook provided by Sun Mingchun, chief economist at Hong Kong broking firm Haitong International, and former Australian ambassador to China, Geoff Raby, who is another economist by background.
Minack said that China’s GDP growth performance had not yet been matched by its investment market performance, which was a major discrepancy which was linked to globalisation. Real GDP had risen by about 800 per cent since 1992, while the equities index had gone nowhere – actually a bit lower now than 29 years ago.
Total earnings in China’s listed sector had skyrocketed since the MSCI China index was introduced in 1996 (up a staggering 45,000 per cent) but per-company earnings were up 19 per cent, compared with 6 per cent per company in the US. But this still hadn’t fed through to better equity market performance in terms of price appreciation plus dividends. US earnings per share averaged 5.3 per cent growth while China’s was minus 0.4 per cent.
Graphing China’s GDP growth against earnings per share, Minack said, showed that 10 per cent GDP growth corresponded with zero earnings per share growth. “So, China has to get to double-digit GDP growth for any earnings growth,” he said.
The globalisation element was most obvious with wages. In the 1990s after trade liberalisation in China, domestic wages were as low as 50c an hour. Today they are about $6.00 an hour. “That’s a huge difference… The beneficiaries have been Chinese workers, economic growth and western importers.”
Minack said that emerging markets businesses had been investing at twice the rate of developed market businesses, but their return on assets had come down to the same level as developed markets, on average. “China is the emerging markets story on steroids,” he said. “Globalisation was a lop-sided shock… Equity returns depend on getting a return on capital correct. This will require cap-ex to start to diminish.”
Raby also told a tale of woe from Australia’s perspective in political terms, impacting on our relationship with China, having apparently sided with the US position to try to limit China’s ascendency as a world power, starting with the prime ministership of Malcolm Turnbull.
The US position, which had been one of positive engagement with China for 40 years, shifted to one of strategic competition in the Obama presidency. A sign of Australia’s complicity is the extension of a US base in Darwin in 2013.
“Then last year, on the day after he spoke with President Trump on the phone, the Prime Minister called unilaterally for an inquiry into the origins of COVID, which clearly should have been done in concert with other countries… The [Australian] Government decided in April last year, while it has not been publicised anywhere, to go tit for tat in retaliation with China. That’s where we are today.”
Raby said: “The reality is that we need China more than China needs us.”