Taking a more pragmatic approach
Share
Desperate times, it is held, call for desperate measures. Maybe they do. Maybe, however, they call for pragmatism – for an open-minded willingness to do whatever works. Certainly, pragmatism has been the common theme uniting the very different responses of China and America to the global downturn. That these two countries, both of them led by pragmatists, offer two of the brightest glimmers of light amid the economic gloom is not entirely coincidental.
A key part in China’s policy response to the global financial crisis has been leaning on state-owned banks to lend: using massive credit growth to tackle the recession. So much for communism. In America, land of the free and home of the credit card, massive federal spending on infrastructure is the order of the day. And while purists on either side of the left-right ideological divide may wince, pragmatists should rejoice: there is evidence, albeit tentative, that the policies of both countries are beginning to work.
China’s economy grew at an annual rate of 6.1% in the first quarter of the year, and that growth gathered speed as the quarter progressed. Fixed asset investment leapt 29% higher over the first quarter. In America there are signs that the downturn may be slowing: consumer confidence is increasing, purchasing managers’ surveys are improving and industrial activity surveys are picking up.
What does that mean to investors? Should they aim to exploit China’s growth and America’s nascent revival by coupling a holding in a good North American fund with an investment in a dedicated China product? Perhaps. Equally, however, perhaps investors should – like President Obama and President Hu – respond pragmatically to the global downturn.
While a case can be made for strategically assembling a portfolio of individual country funds, there is an equally strong case for adopting a more flexible approach: invest in what works, wherever it happens to be listed. Such an approach allows companies to make profits in a different location from the country in which they report them.
So while it is excellent news that America seems to be dragging itself out of recession, the more pressing matter for the pragmatic investor is to identify which companies will benefit. China’s growth is robust? Very well. But that does not necessarily mean you should invest in a few dozen Chinese companies. Instead, a global approach to investment asks what China’s likely 8% growth this year means for stocks. Which companies have the know-how, the market positioning, the brand and the products to take advantage of this growth? Some of these companies may be headquartered, listed and traded in China. But not all of them. As globalisation progresses, the importance of where a company is incorporated dwindles.
Investing in the beneficiaries of China’s growth demands a view that looks at macroeconomic trends through the lens of individual companies, wherever they are listed. But in what sort of companies might this pragmatic investor be interested?
Perhaps companies like China Mobile and New World Development, which are listed in China. Equally, however, the pragmatist might invest in European companies such as ABB and Anheuser-Busch InBev, both of which give investors excellent emerging markets exposure. Anheuser’s beers are popular with consumers in China and America: it sells Budweiser to Americans and Harbin beer to the Chinese. It is also big in Brazil – one of the world’s most attractive markets in demographic terms. But a macro-driven investor investing solely in dedicated American equity or China funds would fail to capture profits arising from the brewing giant’s success: Anheuser-Busch InBev’s primary listing is on Euronext in Paris.
We might also observe that China’s rapid growth and industrialisation is placing great strain on its infrastructure. According to the International Energy Agency, electricity demand in China will double by 2030. To meet that demand, some $11 trillion (£7.3 trillion) needs to be spent on energy infrastructure over the next two decades, and half of that on transmission equipment.
So, should investors turn to Chinese producers of power generation and transmission equipment? Not necessarily.
A high-voltage direct current (HVDC) line between the Three Gorges Dam and Shanghai is under construction, but it is not being built by a Chinese company, but by ABB, a Swiss engineering firm. America is also spending heavily on its creaking power infrastructure and has earmarked $19 billion for transmission, distribution and generation. Here too, ABB’s technological lead in HVDC leaves it well placed to benefit – it has already installed an HVDC line in New York.
Both ABB and Anheuser-Busch InBev are contrasting examples of companies that might attract the interest of pragmatic global investors. Although it is listed in Switzerland, ABB benefits from infrastructure spending mandated in
Washington and Beijing. Anheuser-Busch InBev, meanwhile, exploits the demographic trends of the emerging world while being listed in Europe, where the trend lines all point the wrong way. Desperate times need not call for desperate measures; take President Obama’s lead and try pragmatism instead.
