Postcard from China: Home of the New 'American Dream'

Neil Dwane | 08/06/2016
Neil Dwane on China

Summary

Our global strategist gives investors a glimpse of what lies beyond the official news releases: a capitalist country full of enterprise, where countless citizens are pursuing the American dream in Chinese characters.

While many investors fixate on China's economic data – its exports, infrastructure investments and capital account outflows – we at Allianz Global Investors have long understood that one never gets a well-rounded picture from balance sheets and official news releases alone.

That is precisely why we form our global view using local investment professionals who conduct their own research, and it is why our unique GrassrootsSM Research division has built a network of on-the-ground sources around the world. True insights can come from anywhere, and with a country as dynamic and complex as China, the real story is evident in its residents’ day-to-day lives.

Just visit two of the country’s most popular attractions and one will find a capitalist country full of endeavour and enterprise – one with billions of inhabitants pursuing the "American dream" with Chinese characters.

 

The pandas in Chengdu

On a recent trip to Sichuan to see China’s national treasure – the panda – I saw clear evidence that China is no longer an “emerging” country reliant on cheap exports and “roads to nowhere”:
  • Chengdu, the centre for pandas, has a population of 15 million and has expanded to meet the needs of its population in every direction, building five ring roads and two airports for international and domestic traffic – very much a modern metropolis.
  • The push-bikes are gone and almost everyone now drives a car – most of which are European and Japanese, and cost twice the amount of a local or locally assembled car.
  • Chengdu has become a centre for domestic tourism, with residents flocking to see the rare panda and breathe the clean air of the Taoist mountains.
  • The expansion continues in nearby Dujiangyan, which is building a EUR 8 billion hotel and entertainment project that will significantly increase the number of visitors to the region.

The shift away from agriculture

On the 250-kilometer road to the great Buddha at Leshan, built between 713ad and 803ad, one sees agriculture projects that are small in scale, even though many hillsides are packed with tea plantations reaching up to the top. As the urbanization of China continues, with many agricultural workers migrating to the cities during the winter for extra wages, it is clear that China will need to create more efficiencies and economies of scale in its agricultural sector, as has been done in the US and Europe, so that the country can remain broadly self-sufficient. Yet this process will take time, and the appeal of farming is waning: The younger generation does not want to follow their parents into such a difficult lifestyle, and mobile technology is increasing their awareness of the many opportunities available to them inside and outside of China.

 

The warriors of Xian

In Xian, once the capital of China and the home of the famous terracotta warriors, one finds another huge city, bigger than London, with a population of more than 10 million. The city is a hub for both medical and aerospace research and development, yet it also has serious traffic issues: Within the 10 miles of ancient city walls, built in the 16th century, the roads are not yet big enough to serve the sheer number of cars. Yet despite Chengdu and Xian being called “Tier 2” cities by the Chinese government, they have a modern look and feel – a mix of old neighborhoods, new developments and American-style freeways.

 

The buzzing cities

These less-famous Chinese cities have a buzz and a fast pace of life like any other city in China, powered by soaring populations and growing wealth. Credit the work ethic of China’s people, which remains very strong: For the younger generations, a good education is crucial; their parents, meanwhile, still want to save, provide for their children and buy homes. Most everyone I met seemed fired up by the "American dream" – eager to work hard, get their lucky breaks and get rich.

As China rebalances its economy to find new growth engines, there are still many domestic opportunities for its people to become successful as markets grow and economic maturity spreads wealth. Of course, capitalizing on those opportunities requires the same blend of talent, luck and contacts needed elsewhere. But China’s people understand that with success comes the ability to buy options, just as in the West, which is why they are so energized and determined to succeed – and why each of the country’s 37 provinces has market potential similar to the UK’s. Although still ruled by the Communist party and still classified as an emerging-market nation, in daily life, China feels like a capitalist country – busy, bustling and loud.

 

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (SEC); Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Neil Dwane

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Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.

Will the Markets Keep Climbing the 'Wall of Worry'?

Neil Dwane | 15/06/2016
Neil Dwane on the US economy

Summary

Our Global Strategist investigates whether the long-running US equity rally - although still the best game in town over recent years - may be running out of steam. A new batch of worrisome results has brought the US economy’s health into question, especially with the Fed keen to raise rates, but so far unsure how quickly it can do so.

Despite the continually dull economy in the US, its risk markets are still doing well and outperforming other global opportunities. Yet even as the S&P 500 flirts with all-time highs, a plethora of poor economic data points are making some investors concerned about the markets’ ability to continually climb a “wall of worry”.

Indeed, I’ve been asking AllianzGI's chief investment officers every month about their outlooks, and their response has been both one of confidence (that we will not face a global or US recession in the next year) and concern (that their portfolios may be faced with an economic downturn of some sort).

So how is one to reconcile this duality, and what if the situation changes? Perhaps a brief look back will show us the way forward.

How did we get here?

It has been clear for several years that the US has not, is not and will not be enjoying a normal recovery from the Global Financial Crisis and its sibling recession – as we anticipated when we formed our Financial Repression thesis: 
  • US equities have been sustained by low interest rates, by truly enormous share buy-backs – nearly USD 1 trillion per annum, funded from the credit markets – and by expectations that heroic monetary policies would create "escape velocity".
  • Yet "escape velocity" has not been generated sufficiently to allow the Fed to move far from close to the zero bound, despite both a tightening labour market and solid levels of consumer inflation.
  • US fixed-income markets have been hamstrung by the Fed’s vocal desire to start raising rates and by the presence of a shale-oil borrowing binge, which has raised the sinister spectre of defaults and bad debts.
  • For global investors, US Treasuries and high-yield bonds seem a bargain when compared to yields in "NIRP-y " (Negative Interest Rate Policy) Japan and Europe, where negative interest rates and Quantitative Easing are still the norm
  • This international demand is suppressing the yield level of US bonds, which would more accurately reflect the all-time highs we are seeing in the S&P 500... right?

Where are we headed?

Despite these record highs – and despite an equity market rally that has been one of the most unenjoyable of all time for institutional and retail investors, who have generally sold while hedge funds remained neutral – we are seeing poor economic and corporate results: 

  • Non-Farm Payrolls had a bad showing in May, and the trend in this employment measure has been falling since last October – and moving toward lower-paying sectors.
  • The Fed's own regional activity surveys have now turned negative, as has the positive momentum from independent surveys such as Markit’s, which show that US industrial production, though only constituting about 15 per cent of the economy, has been negative in 2016 – historically a sign of a recession.
  • US corporate earnings have been in decline since the fourth quarter of 2014 and actually fell seven per cent in the first quarter of this year. A further drop is expected in the second quarter, even as the usual “rose-tinted optimists” expect more than 10 per cent growth in the second half.
  • More than 70 per cent of the US economy is driven by consumption, which has been dull and is now causing enormous strain on retailers, from Walmart to Ralph Lauren to Macy's. Indeed, it seems fair to postulate that real-world US retailers are being hurt by the pricetransparent disruptive hammer of firms such as Amazon and the anvil of actual consumption, limited by low wage growth.
  • While housing seems to be okay at the moment, affordability notwithstanding, investment by Government and corporations remains sub-par as they await a new administration in 2017, and as companies continue to prefer buy-backs to boost returns immediately rather than to invest for the future.

What should investors do?

Bull markets do indeed climb "walls of worry", as the saying goes, but history also rhymes. Investors should review for themselves the actual health of the US economy, particularly given this late stage in the economic cycle and a central bank that is keen to raise rates. In many ways, the US is overowned, expensive and at greater risk of economic disappointment than either China or Europe – and it is still in the midst of a vicious election cycle. As such, AllianzGI’s CIOs may be right to have a US recession on their radar.

Nevertheless, the ongoing presence of Financial Repression means that, for investors, there remains no viable alternative to taking risk. With no “escape velocity being achieved”, whether investing in US markets or elsewhere, focusing on growth, quality and income are good ways to navigate markets where owning risk assets is a necessity to earn a return and employing flexible, active strategies can help investors guard against the volatility that will almost certainly continue over the short to medium term.

 

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (SEC); Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

Expert-Image

Neil Dwane

linkedIn
Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.

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