2016 Global Economy & Equity Outlook (Part 2) | Asian and European Economy

Here are the other parts of the 2016 Global Economy & Equity Outlook:

Part 1: United States Economy
Part 2: Asian and European Economy
Part 3: Commodities Market
Part 4: Australian Economy

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Ben Kingsley: Let’s go into China and more broadly speaking, Asia. Where do you see the Asian and obviously the biggest economy in that market? Second biggest economy in the world is the Chinese economy. Where do you see that sitting for 2016?

Michael Savy: The Chinese market, they’ve certainly got a few key variables that will impact their economy. But in terms of what they’re trying to do, it does fit into their long term plans.

Ben Kingsley: Yeah.

Michael Savy: In terms of their economy, if we’re to put that rating, it certainly is lower than what we would offer the US.

Ben Kingsley: Yeah.

Michael Savy: Probably the fives, even sub-five around the fours.

Ben Kingsley: Yeah.

Michael Savy: Partly because of these key variables that could lead the market any which way in China. The problem or the issues that the Chinese are having trouble with at the moment is this transition from a market – export manufacturing economy to a services industry or consumer-based industry.

Ben Kingsley: Yeah, yeah, yeah.

Michael Savy: The issues that the Chinese are having trouble with at the moment is this transition from a market – export manufacturing economy to a services industry or consumer-based industry.

Ben Kingsley: Yeah.

Michael Savy: I have been speaking to some clients about this and I do remind them that with all transitions, there will be a lot of volatility partly because the uncertainty of outcomes.

Ben Kingsley: Yeah

Michael Savy: Similar to Australia in the early 80s when we did our devaluation.

Ben Kingsley: Yeah.

Michael Savy: And things like that generally will lead to further down the track some winners and some losers in that and it’s trying to find where that’s going to be positioned.

Ben Kingsley: Yeah. If I could add to that, I mean what analysts want is consistency and predictability. Obviously when you get market interference from the government, you know, at the moment obviously they play around with the currency and they’re also – they’ve had to interfere in the stock market as well. That might seem like a good idea at the start. But what actually then happens is no one knows what their next move is going to be.

So we’re seeing them interject closed markets, put buffers on – you know, cancel stop-losses and those types of things in terms of shorting stocks.

So it’s really important to understand that. When we’re trying to analyse these types of areas, we want some consistency and some clear direction, so we can sort of do our numbers to see whether there’s opportunity in those markets. What we’re seeing in China is this transition that I don’t think they know in terms of what the best levers are to pull themselves. So when the Australian economy was saying off there before, when the Australian economy transitioned to a free market economy, the effect of floating the dollar in the early 80s there, we saw the – saw the same sort of thing happened until we come out the other side and off we went.

Michael Savy: There’s always going to be a rebalancing after the fact once everyone has had a chance to do it. What China has to try and achieve and last year we touched on the fact that they were issuing their new 5 year plan which they have sort of come out late last year.

Ben Kingsley: Yeah.

Michael Savy: I’ve had a quick chance to go through it and a lot of it is the same. But three key takeouts that I saw that weren’t necessarily in the original or the previous five-year plan was they do have a key focus on internal financial liberalisation. So improving their banking systems and all those types of things internally.

There was also a strong focus on international trade and liberalisation finance and we could sort of see that with the established of the Asian infrastructure, banking, those types of things, which we are a party to.

Ben Kingsley: Yeah.

Michael Savy: And the last one that I saw which was quite interesting was their policy on the concept of the One Road One Belt Policy, which is essentially they’re trying to recreate a 21st century Silk Road, transportation of goods and services from China to Europe by land and by seaborne. So that’s a large infrastructure task that they’re going to embark on.

Ben Kingsley: Well, they’ve got China, Mongolia around through Russia and into that – as you say, the historical Silk Road we know. This is the amazing part of it at China in terms of they were doing trade with the Romans.

Michael Savy: That’s right.

Ben Kingsley: So it’s a really exciting thing for them. But as the market has seen, it’s a transition time from the heady nines and ten GDP numbers down to trying to track to six and now sort of hitting headwinds around.

Michael Savy: I think that’s one of the key things that we have to take away from that is that obviously a lot of the volatility we saw, which started in August and continued, has come off the back of the PMI manufacturing numbers which is sub-50 and has been sub-50 for the last few months.

Now, if that was the case, if those were the numbers that we were reading in 2010, that was an issue or even pre that. But now the manufacturing side of the economy or the composition is certainly less than what it used to be.

Ben Kingsley: Yeah.

Michael Savy: The services component of the GDP in China is now higher and it has gone above 50 percent or just around about 50 percent of the GDP. So the impact of the manufacturing was still important to the Chinese. It’s probably not as significant as it used to be and that’s what we have to get our head around as well, especially for example when they were trading at or generating 10 percent GDP. Their inflations were sitting at around about the fours, the fives.

Ben Kingsley: Yeah.

Michael Savy: So the real wealth to a Chinese person was still in the fours and fives. So whilst they’re achieving sixes and sevens, the inflation number is around about the ones and twos. So some more manageable set …

Ben Kingsley: Yeah.

Michael Savy: The real wealth effect for the Chinese people is still there but it’s certainly a more manageable process.

Ben Kingsley: Yeah. If we finish off on China, one of the points I would make there is around the Chinese government trying to retain some of that wealth in the economy. We’re seeing the wealthier people potentially invest in offshore, trying to get their money out of a – you know, technically communist country and so the Chinese government is trying to stop that from happening.

But I mean if the Chinese government would actually look at sort of giving them reasons to invest back in – you know, 1.3 billion people, there has got to be opportunities for that money to find good investment opportunities there. But of course there’s this flight of that currency.

Michael Savy: We’ve seen that. I mean the reason why I say hopefully – later in the year, we will see some better sets of numbers and we’re getting more clarity because yes the government has tried some policy decisions or tools which haven’t worked necessarily with the markets.

Ben Kingsley: Yeah.

Michael Savy: But hopefully over time, we will see better decisions made and one of those things may be cutting back their required reserves and some form of quantitative easing and we’ve already started to see that in the growth of the money supply, so the M1 money supply, which is generally a good lead indicator for economic activity. The question is hopefully it doesn’t all end up in the property market.

Ben Kingsley: Correct, because we don’t want property bubbles. I think the other – again, you’ve sort of …

Michael Savy: Sorry, Chinese property market.

Ben Kingsley: Yeah, that is. It’s not obviously the Australian property market. In terms of the challenge they’ve got around lowering interest rates is – also had that impact on the dollar. So from that point of view, that’s their – as they’re trying to transition.

So they’ve got a few challenges and that’s again why we – I suppose you wrap them up as a four to five, but they will come out the other side.

Michael Savy: There are fours and fives because of the variabilities there, but just bearing in mind that – because I think the – the key issue with China is that people – there are two sides of the camps really. There’s the hard lending camp and the not hard lending camp I guess.

Ben Kingsley: Yeah.

Michael Savy: I’m a subscriber to the latter and not the former.

Ben Kingsley: Yeah.

Michael Savy: Partly because of the fact that they do have quite a bit of ammunition up their sleeve.

Ben Kingsley: Yeah, they’ve got a bit of …

Michael Savy: They have the $3.5 trillion in – from reserves. I know that some people have quoted the fact that the Chinese debt levels have gone up to 240 percent.

Ben Kingsley: Yeah.

Michael Savy: But keeping in mind that that is total debt. The government and private homes or household debt is still relatively low, as in sub-50.

Ben Kingsley: Yeah.

Michael Savy: And to put that into perspective, the US total debt is around about 330 percent to GDP.

Ben Kingsley: Yeah. I think that – look, I think everyone wants a soft landing because the world can’t afford in its precarious-geared position that it is in not to have that soft landing. They will do everything they can, the sort of fiscal and monetary policy makers around the world. They’re going to try their best to not have that hard landing because that will have a flowing effect to other economies.

Michael Savy: Yeah, look, and the – in their five-year plan, they’ve put it out there. The next five years, they’re targeting a 6.5 growth.

Ben Kingsley: Yeah.

Michael Savy: The previous five years, they targeted seven. Again, very good numbers to come in at 6.9.

Ben Kingsley: Well, that’s compounding numbers too.

Michael Savy: That’s right.

Ben Kingsley: You can’t forget that. It’s pretty big.

Michael Savy: I think if the Chinese can still maintain – even if they come a little under at the six market, that would still be supportive of global growth.

Ben Kingsley: Yeah. And improve living standards for the local people, which is really important.

Michael Savy: A hard landing scenario would be if they went sub-five.

Ben Kingsley: Yeah.

Michael Savy: That would be a concern.

Ben Kingsley: Yeah. OK. Let’s jump into Japan, one of Australia’s biggest trading partners. Where do you see the Japan economy?

Michael Savy: Look, Japan interestingly late last year, they had a very quick or flash recession.

Ben Kingsley: Yeah.

Michael Savy: They’ve had a – they’ve been doing quantitative easing for some time.

Ben Kingsley: Yeah.

Michael Savy: Japan is quite a different kettle of fish to China. They’ve been in a downward spiral inflationary position for quite some time. So they’re now trying to get themselves out of that and recently they just announced the negative interest rates and that is in part for them – or they’re trying to drive or get inflation up, which is some activity in their economy.

Ben Kingsley: Yeah. And getting – so just to explain that, what they did was they didn’t make it a blanket negative interest rate. They’ve said those cash reserves are fine. But anything, any spare cash reserves that you’ve got with us, we don’t want. Get it out into the economy. Start lending that money. Start stimulating growth. Start stimulating jobs and move us into a positive GDP environment. Yeah. Quick comment on India. Do you see that as an emerging market economy?

Michael Savy: I look at it as a merging market economy and in some respects, we’re all hoping that they certainly pick up some of the slack that the Chinese have dropped off.

Ben Kingsley: Yeah.

Michael Savy: Again India …

Ben Kingsley: Cost of labour story is going to be a fairly good one.

Michael Savy: Yeah, that’s right. They’ve got the key demographics. They’ve got the position from where they can certainly go forward.

Ben Kingsley: Yeah.

Michael Savy: And some commentary and even myself that I subscribe to. I think India is probably where China was pre-2000, just pre-2000 in this. But again, they need …

Ben Kingsley: So 15, 20s, behind.

Michael Savy: Yeah, they need the – I guess the government and the policy makers behind it.

Ben Kingsley: Yeah.

Michael Savy: And to actually execute and implement.

Ben Kingsley: Correct. I know that as a non-communist country, it’s hard to get that firm change. Oh, we need a freeway through here. Let’s knock all those things.

Michael Savy: That’s right.

Ben Kingsley: That doesn’t quite work in India.

Michael Savy: That’s right.

Ben Kingsley: Just like it does in China.

Michael Savy: There is certainly a strong ground middle class in India and it’s the same as in China. That’s what we’re looking at at the moment.

Ben Kingsley: Yeah. I think their education levels are increasing and the opportunities in the New Age economies and innovation technology economies. I think there are some exciting times for those two nations ahead. Let’s have a quick look at Europe. Where do you see Europe?

Michael Savy: Europe has benefited from the quantitative easing. Again like the rest of the world, inflation numbers are a little bit low. But we are seeing an improvement in their business activities and also the manufacturing. In fact, the PMI numbers globally, I think Europe has got the strongest. They’re sitting around about 56 – I think Germany that is I was referring to.

Ben Kingsley: Yeah.

Michael Savy: Which I use as a general benchmark. They were sitting at the 56 mark at points, to the December quarter.

Ben Kingsley: Yeah.

Michael Savy: So the quantitative easing is working there and in terms of valuations, it’s probably an attractive valuation there.

Ben Kingsley: From an equities point of view?

Michael Savy: From an equities perspective relative to where the US is trading at the 18 bench..

Ben Kingsley: Yeah.

Michael Savy: But again Europe still has a few headwinds in the next year or two possibly.

Ben Kingsley: Generally, you sort of structure staying together and …

Michael Savy: Yes, that’s right because previously we had the Grecit concerns late last – or mid last year. I think this year and possibly next year we have the bigger and more realistic probability of the UK or Brexit, I think they’re calling it. So the UK actually potentially leaving, if they’re not satisfied with the terms of the EU.

Ben Kingsley: Yeah. OK. UK economy quickly.

Michael Savy: Look, they’ve been doing really well. They’ve probably one of the – the stronger players in there in Europe and even Europe as a whole with regards to some of those PIIGS. Again, we’ve sort of forgotten to talk about the last few years.

Ben Kingsley: Explain to the viewers what the PIIGS are.

Michael Savy: Portugal, India …

Ben Kingsley: Yeah, Greece.

Michael Savy: Sorry. It’s Portugal, Italy, Ireland and Greece.

Ben Kingsley: Yeah.

Michael Savy: These countries that had a lot of the issues during – coming out of the GFC.

Ben Kingsley: Yeah.

Michael Savy: And if we look at the Irish economy, again they’ve started to pick up. Their manufacturing started to pick up as well.

Ben Kingsley: Yeah, OK.

Michael Savy: And they’ve been doing really well with the exception of possibly Greece.

Ben Kingsley: OK. So now let’s …