Headlines scream daily about the “trade war” between the United States and China, spurred by real and threatened tariffs and fitful negotiations. These are not small issues, given that the United States accounts for almost 25 percent of global gross domestic product (GDP), and China is second at around 16 percent. The longer it lasts, the bigger the impact on these and other economies—and their stock markets.
Who pays for trade wars? At the end of the day, everyone pays. Everybody seems to be invested in U.S. equities, U.S. bonds and U.S. currency. If that trend reverses—as it did in 2002 and 2003—it would be a very powerful move for international equity and bond markets.
Yet focusing on these macro conflicts crowds out a key story driving investment opportunity: Chinese consumers are doing well, better than ever, even as many investors overlook them.
We are growth investors. When moving beyond the United States and other developed markets, investing in emerging markets (including China) generally brings with it more volatility. We constantly ask: is there enough upside in terms of growth to make the increased risks worthwhile?
Growth in China is not particularly overpriced; it’s actually pretty well priced. That growth can continue for a long time because of the structural changes occurring in the Chinese economy—chiefly the growing strength of the consumer—and the market is not pricing for that at this point.
Many of the companies that serve the rising Chinese consumer class are doing very well. This leads us to be comfortable with names like Alibaba and Ping An Insurance. They can grow for a long time, a case we cannot make as well for other parts of the world. The volatility these stocks bring into our portfolios has not been not particularly destabilizing. The Chinese consumer also travels and is a big spending force in Japan for companies like cosmetics maker Shiseido and for luxury brands such as LVMH.
The Chinese economy is nuanced in terms of what is growing, what is not growing and what is really impacted by trade issues. To offset damage from American tariffs, China incorporated massive stimulus measures, spread over 2018 and 2019, in absolute terms the largest it has ever done: roughly 5.6 percent of GDP. It is sometimes forgotten because the Chinese economy continued to grow during that time.
One of the most important moves was bringing down the reserve requirement ratio for banks, allowing them to lend more with their existing capital to business and retail customers. It is a powerful tool, but it takes time to filter through the system, and it worked well.
The Chinese primarily targeted encouraging liquidity in their banking system and financial markets, which is very important to fostering economic growth. What is less well known is they also issued special government bonds—and gave tax cuts to their consumers.
A lot of growth within China is not necessarily linked to GDP growth, so many developments in China will be relatively insulated from the tariff squabbles. In the short term, though, sentiment can impact markets, specifically the stock performance of some of the traditional state-owned enterprises: they are more levered, so they can be more worrisome.