Why Slower Growth Still Means More Growth

Well it’s official. Global growth is slowing down. That’s the latest from the Worldwide Monetary Fund’s (IMF) World Economic Perspective anyway.

The IMF — once again — downgraded it’s forecast for global development in 2015 from 3.5% to 3.1%. With under three months left in the year, the actual Fund’s perpetually optimistic economists were running short on time to get their numbers straight.

And while they were in internet marketing they offered a rather demure forecast for China too. According to the report, China’s growth will be at 6.8% in 2015, as well as average 6.3% over the subsequent five years.

Now when I read this forecast I had two thoughts. First, that’s quite an driven time horizon to be predicting growth in one of the world’s quickest changing and most opaque financial systems. You have to wonder what exactly these boffins do and did not include in their modelling for the regional geopolitical scenario in 2019.

But as our aged buddy Dan Denning writes over at Capital & Conflict from our affiliate office in the united kingdom, ‘I suppose if you’re an economist at the IMF, you have to do something for a living. You might as well make a guess about Chinese GDP growth.’

My second believed was that 6.3% annual growth is nothing to sneezing at. Sure it’s nicely below China’s 10.82% average rate of growth from 1989-2015, as cited through Trading Economics. But you have to take into account that this growth is coming off a much larger foundation.

Using IMF data and factoring rising cost of living into the mix, China’s current Gross domestic product is approximately 22 times larger than it was in 1989.

You may think of that as a go up. If a small balloon, say with a volume of one cubic metre, develops 10%, the new volume is 1.1 cubic metres. In this case you have added 0.1 of the cubic metre to your…err…economy.

Now if you start with a balloon that is 22 times larger — Twenty two cubic metres — and it grows by only 6%, the new volume is 23.3 cubic metres. Or perhaps an extra 1.3 cubic metre distances. That represents 13 times more real growth than you have with the faster-growing, smaller balloon.

Targeting the right Asian markets

I point this out for a reason. Even though China’s development is slowing on a relative level, as it must, there’s still an enormous amount of new wealth that will be created over the subsequent five years.

And investors who know how to target that growth stand to do quite well.

Take Treasury Wine Properties [ASX:TWE] for example. The stock hit a new high last week at $6.70. (Currently it’s trading at $6.65.) Have a look at the chart below. It exhibits the share price movement forever of August.

Source: Yahoo Finance

You’ve got to admit, that’s a nice looking chart. Especially when you compare it to the performance of the ASX Two hundred over the same period.

Source: Google Finance

Treasury Wine’s shares move in almost reflection image to the falling ASX Index. What’s their secret? Largely a growing demand for their product from Asia.

As reported through Business Day, ‘Asia growth lifts Treasury Wine shares’:

‘Treasury gives hit a record on Tuesday, despite wobbles in global marketplaces that have caused the larger Australian share market to shed more than 13 per cent previously six months. Treasury shares, trading around $6.70, have moved beyond the buoyant levels of $6.47 in May 2013.‘

According to Chief executive Mike Clarke, ‘The accelerated momentum in our business continues to be delivered across all regions, most notably Asia.‘

Of course this came because no surprise to our emerging marketplace expert, Ken Wangdong. Here’s what he wrote last week to subscribers associated with his premium investment service, New Frontier Investor:

‘The truth is, we know 2015 growth is going to be lower. China has been slowing for some time now. This is old news!

‘What this recycled information has succeeded in doing is actually driving asset prices lower in most emerging markets. The far east in particular is very cheap at today’s prices. Right now china market appears to have reached the bottom. Some stocks are already starting to regain their worth.

‘Not according to many in the mainstream media, of course. But the press will always distort information… However i can’t blame those who have not really spent time in China to have a hard time distinguishing facts through media hype. How can they?

‘For example, how can you know how Apple [NASDAQ:APPL] is doing in China if you don’t know how conspicuous Chinese consumers are over Apple products? Or that most Chinese use Didi instead of Ultra.

‘It doesn’t matter if China develops at 7% or 6.5%. Apple will do well, Apple Music will do reasonably well, as well as Didi will do well. Yum Brands [NYSE:YUM] (which own KFC, Pizza Hut, and more) derives over fifty percent of its revenue from The far east, and it is becoming under-valued.

‘But if you depend on the mainstream financial press for your investment news, you would never know this. You need to be familiar with China to know it.’

That’s, of course, where Ken comes in. Not only is he a skilled investment analyst, however he knows the ins and outs of Chinese language culture, allowing him to identify breaking trends. And he moves back to China from their home in Sydney regularly to meet with local connections. That allows him to keep their finger on the proverbial heartbeat.

This week he’s recommending two new stocks to their readers, taking advantage of sectors which should handily outpace any average development figures. You can find out more about Ken’s function here.

Oh… cash!

Back here in Australia it seems that cash is headed for exactly the same fate as the cheque book. At least if my current interaction with a Myers’ clerk is anything to go by.

You see, I bought a few shirts at the nearby Cheltenham outlet last week. Nothing extravagant. The total came to $225. But when I counted out the bills in cash it felt like I was paying with dinosaur eggs.

The young woman behind the counter hesitated before uttering, ‘Oh…money!‘

To which your editor wittily responded, ‘Umm…yup.’

Her eyes were wide because she took the book paper bills from me. Her unfamiliarity with hard forex was clear in the length of time it took to safely shop my five $50 notes within the ‘cash register’ and return the proper change.

It was obvious that almost all associated with her customers pay digitally. A trend that — enjoy it or not — is sweeping the world. The Age ran an article now reporting on how more and more local and international companies are operating cash free businesses.

‘…in Denmark, they are considering becoming the first country to stop using notes as well as coins from 2016. Norway’s central financial institution estimates Scandinavians use cash to cover less than 6 per cent of transactions…’

The article goes on to say that according to the latest research findings by Westpac, ‘The bank’s Cash Free Statement recently predicted Australia’s dependence on mobile phones will see it cash-free by 2020.’

Now I’m not sure that 2020 is a realistic target date. But I do know that with ever more money transacted via mobile phones, hackers will go to excellent lengths to break in and help themselves. And as technologies gets more sophisticated, so do internet criminals.

That’s one of the reasons our in-house tech guru, Sam Volkering, has been examining and hunting down the best listed companies involved in defeating these hackers. Sam’s been on top of this particular trend for years. And he’s recommended a group of companies to subscribers of Revolutionary Tech Investor that he calls the ‘Defenders’. Despite the hit that the wider tech field has taken in the markets lately, the Defenders are still up typically 21.8%.

You can find out more about Sam’s function here.

Regards,

Bernd Struben,

Managing Editor, Money Morning

From the Port Phillip Posting Library

Special Report: The End of Australia Vern Gowdie’s new book is called The End of Sydney: The Real Story Behind Australia’s Financial Collapse and What You Can do to outlive It. We are mailing free copies of the book to anyone who demands one online. It does not make for cheerful reading. But the idea is that you’ll be safer (and much wealthier) in 10 years’ time from receiving a more sober and realistic analysis of what’s going on…what happens next…and what you should be doing about it right now… (more)