07 Feb 2012
I would like to first thank the members who have provided feedback and suggested improvements to the investment section of our website. Regarding this column it seems that there are some who find it too technical and some not technical enough. Unfortunately, with 400,000 members, it has to be expected that a generic discussion of market developments will always ‘miss the mark’ for some. We will however attempt, where possible, to minimise the jargon and relate the information to UniSuper’s general positioning.
Also, those who want to see information relating to a specific option should refer to the Options and Performance section of our website. As above mentioned, this column is intended to provide a generic update on markets, specifically intended for those who tend not to look at markets on a daily basis but want to stay in touch every month or so.
Share markets around the world have begun 2012 on a positive note; a welcome relief after 2011's poor performance. The Australian share market was up about 5% and the US market was up about 4%. Asian markets, excluding Japan, fared even better and were up about 8%. Unfortunately for those invested offshore, the gains in those markets were partially eroded by a strong Australian dollar which appreciated by over 4% versus the US dollar. Cash returns for the month were 0.30% and bonds were slightly negative as yields rose (and prices fell). These returns resulted in a 3% positive return for the Balanced Option for January, which is still down approximately 1.5% for the financial year to date due to the poor performance of the share markets in the latter half of 2011.
The positive tone in January has been the result of a few key factors. Measures of manufacturing output around the world have generally surprised on the upside, and US statistics in particular continue to provide evidence that the world’s largest economy is on a steady recovery path. The European Central Bank has flooded its banking system with liquidity which has gone a long way to reassuring the markets that the banks will not ‘freeze’ like they did during the depths of the crisis, which effectively ground the world economy to a halt at that time. However, providing ample liquidity to the banks does not solve the debt problems of the peripheral countries, and Greece is still facing the real possibility of default if it cannot convince creditors that it is worthy of further bailout funds due in mid-March. While policymakers are reassuring markets that progress is being made, the European situation has an uneasy feeling of déjà-vu to it.
The strong performance of the Asian markets was particularly pleasing as UniSuper’s share portfolios have been deliberately positioned to benefit from the excellent growth prospects and healthy fundamentals of the region. During the second half of 2011, many Asian markets suffered capital outflow as risk-averse foreigners repatriated capital. January saw early signs of this trend reversing, with capital inflows being recorded. Of particular note has been evidence that China continues to orchestrate a ‘soft landing’ of the economy from the unsustainable growth trajectory seen over the past few years. Encouragingly, inflation moderated for the last five months and the leading indicators are pointing to further declines. Policymakers are still likely to move cautiously in applying stimulus to the Chinese economy, however, there has already been a subtle shift from a sole focus on suppressing inflation towards growth supportive measures as well.
Are we nearing the end of China’s spectacular growth story?
A consistent theme of our investment commentaries has been the critical dependence we have on China, both from a real economy perspective and returns on financial assets. We see the recent moderation of Chinese growth and inflation as a significant positive as it puts the economy on a more sustainable medium-term path.
However, our positive view of China is not shared by all, and indeed some see the moderation as the early stages of a crash or at least an economic ‘hard landing’. Jim Chanos, a well-known, highly opinionated hedge fund manager, reckons China is "Dubai times 1,000, or worse." (As an aside Chanos also admits to not having visited China.) The likes of Chanos typically point to misallocation of assets, over-investment in certain industries, creating enormous overcapacity which typically results in a crash. A metric frequently used to demonstrate this pattern is China's meteoric rise in steel usage over the last decade.
China steel consumption
China, US and Japan steel consumption
Over the past decade China has accounted for about half of the total growth in global demand for commodities, and the rise in steel consumption is a clear manifestation of this growth. Prima facie, comparing the growth in China’s consumption with that of countries such as the US or Japan, it is understandable why people are fearful of a crash.
However, drawing conclusions on the basis of growth comparisons can be very misleading as the economies are at different stages of development. Furthermore we need to take into account that that China has a much larger population than the US and Japan combined. If we look at the stock of steel per capita (as distinct from growth) the picture looks a lot different and somewhat more comforting.
Per capita, China’s stock of steel is significantly below other developed countries, implying that current growth rates are still sustainable for some time. While this is only one metric, it is a telling statistic given the need for steel in infrastructure development.
Another factor underpinning growth is that the Chinese cities with the largest populations are still much poorer, on an income per-capita basis, compared to the first-tier cities such as Beijing and Shanghai. We can expect these gaps to close, and increases in income of a large population base should result in elevated levels of China steel usage for many years to come. This is great news for exporters of raw materials.
China’s economy is already the second largest in the world and, by some accounts, is on track to be the largest in the next couple of decades. It is impossible and/or highly undesirable for an economy of China’s size to keep growing at double-digit rates. The fact that the Chinese policymakers are trying to moderate growth, and strike a balance between investment and consumption, is a positive sign for Australia and we feel that fears of an impending crash are unjustified.
This information is of a general nature only and includes general advice. It has been prepared without taking into account your individual objectives, financial situation or needs. UniSuper’s investment strategies will not necessarily be appropriate for other investors. Before making any decision in relation to your UniSuper membership, you should consider your personal circumstances, the relevant product disclosure statement for your membership category and whether to consult a licensed financial adviser. This information is current as at 7 February 2012 and is based on our understanding of legislation at that date. Information is subject to change. Issued by UniSuper Management Pty Ltd on behalf of UniSuper Limited, the trustee of UniSuper.