The rising in the East.

Michael Power is a strategist at Ninety One (Investec). Here are a few of the interesting comments he made on a webinar last week:

  • China will have overtaken the USA as the biggest economy in the world by 2023. We will see the US dollar weakening in favour of the Chinese yuan and investors will see value in gold and even bitcoin as the dollar devalues. China used to be the place where innovative products from the West were made cheaply and then exported back to the West. We are now starting to see the shift in China from a commodity-driven economy towards a consumer-based economy, with the production and home use of previously Western-dominated  items like planes and mobile phones. We can see the fierce battle that Donald Trump is waging against China to prevent this shifting of power happening; by using trade wars, repatriation of USA companies with tax incentives and conspiracy theories about the origins of Covid-19. In some areas the USA is heavily dependent on imports from China, such as 90% of their antibiotics and 80% of rare earths. As investors we have to be awake to these strategic shifts in world dominance and start diversifying our portfolios to ensure we do not miss out on these opportunities presenting themselves in the emerging East.
  • Europe is tearing itself apart and we might see a break between northern and southern Europe. In southern countries such as Italy and Spain, 50% of their GDP comes from tourism. This year there will be no tourism, resulting in a situation comparable to an annual crop that failed. This will push them even further into debt and their standing in the European Union will become even more precarious. Germany in the north is already challenging the validity of the European Central Bank’s quantitative easing programme and their Constitutional Court has issued a statement that said that parts thereof is illegal under German law.

As a South African citizen, and an investor in our own economy, we have seen the value destruction that can be caused by specific geographical exposure. We have seen the power of diversification and appreciated the hedge our American dollar exposure has given us over the last few years. We now have to look at the future and re-evaluate some of our current beliefs.

We have to ask questions such as: Do we have to invest in gold and bitcoin in anticipation of a weakening dollar? Do we lower our exposure to the US market and increase our exposure to the markets in the East like China, Vietnam and Korea? Do we avoid the Eurozone completely?

These are not questions we have to answer immediately, but we have to keep them on our radar.

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