By Fits and Starts
Pfäffikon SZ, Switzerland – There are basically two issues that have been occupying the financial markets in recent months: Greece and China. Of course, ever-falling commodity prices, possible rising interest rates, and vigorous currency fluctuations also play a role. However, the developments surrounding Greece, in particular, can be called miraculous. How does a country with a great track record for default manage to pry out more money out of the European Union and the IMF?
China
The other bungler is China. The devaluation of the Chinese renminbi is chasing investors into the curtains, and currency wars could be fought. Perhaps less known is that there are two exchange rates for the renminbi. The onshore renminbi is used in the country, and the offshore renminbi is freely negotiable. It is logical that the offshore renminbi makes a deeper genuflection than the onshore renminbi. China’s ambition is to be included in the basket of global reserve currencies. An important step would be the acceptance of the special drawing rights (SDR) basket of currencies of the IMF. Even after the recent plunge of the renminbi, this process has not been not compromised. For the seasoned Asian equity investor, the devaluing of the renminbi, in my point of view, should generate the ultimate buying opportunity.
Consequences
The devaluation of the renminbi does have the necessary impact. Simply put, a decline of a currency is good for exports and stagnates the imports from the country concerned. China imports, for example, crates of bananas, and this is a bit trickier. On the other hand, China wants to gain market share in the attractive world of smartphones. This desire becomes a lot easier with a cheap currency. But do not forget the impact on the steel industry. On balance, China exports steel, and this will result in a significant amount of pressure on prices over the coming months. Commodity believers have to belt completely down the hemlock.
Transition
Many investors screen with a Chinese growth of approximately 7% per year, but this is unrealistic. It has already been known that the Chinese data should be taken with a grain of salt. Some research companies believe that China’s growth is somewhere between 2.8% and 3.1%, which is an excellent figure. Additionally, China is a country in transition, in which the emergence of a massive middle class is one of the real possibilities. This process is accompanied by fits and starts, but it will eventually take shape. In particular, European investors seem completely captivated by the temporary Chinese virus and ditto currency fluctuations. For long-term investors with common sense, there arises a market that offers many opportunities.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the other above mentioned shares and has no intention of doing so in the next 72 hours.
