Uh oh. Yesterday we wrote about how the “growth markets” could save Australian investors from another seven years of flat returns from the stock market. But what if the growth markets don’t grow? If the growth markets don’t grow, picking winning Australian stocks is going to be a lot harder.
China’s economy will grow at 7.5% in 2012, at least if Chinese Premier Wen Jiabao has his way. Wen opened up China’s Parliament on Monday with a speech that said a nostalgic goodbye to double-digit growth rates. If China does grow below 8% this year, it will be the first time it’s done that since 2004.
We’ll get to what this could mean for Australia in just a moment. But just what did Wen say? According to the Financial Times, he said, “The key to solving the problems of imbalanced, uncoordinated, unsustainable development [in China] is to accelerate the transformation of the pattern of economic development. This is both a long-term task and our most pressing task at present.”
Wen was indirectly referencing something he said almost five years ago. On March 16th, 2007 he held a press conference at the end of the Tenth National People’s conference. He was asked how China would achieve high growth without causing inflation. His answer was a bit of a bombshell. He said:
China’s economy has maintained fast yet steady growth in recent years. However, this gives no cause for complacency, neither in the past, nor now, or in the future. My mind is focused on the pressing challenges…There are structural problems in China’s economy, which cause unsteady, unbalanced, uncoordinated and unsustainable development.
Unsteady development means overheated investment as well as excessive credit supply and liquidity and surplus in foreign trade and international payments. Unbalanced development means uneven development between urban and rural areas, between different regions and between economic and social development. Uncoordinated development means that there is lack of proper balance between the primary, secondary and tertiary sectors and between investment and consumption.
Economic growth is mainly driven by investment and export. Unsustainable development means that we have not done well in saving energy and resources and protecting the environment. All these are pressing problems facing us, which require long-term efforts to resolve.
You have to give Wen credit. He’s clearly aware of the structural problems in China’s economy. Yet he seems completely committed to the idea of “managing” these problems with public policy. That is what Austrian economist Friedrich Hayek called “the fatal conceit”. It’s an error of hubris in which you believe that just because you are aware of problems, you can reorder the world to solve them in just the right way.
Big economies with billions of people are complex systems. Individuals make trillions of decisions. No one person—or no National Development and Reform Commission with a 12th five-year plan—possesses enough knowledge to make a plan that survives its first contact with economic reality. China’s central planners can try all they like to make structural reforms. If they proceed in the belief that the economy is a machine they can operate, they’ll blow the whole thing up.
This is our contention anyway. It’s an argument we’ll be making next Thursday in Sydney at our investment conference. One person who will probably disagree is David Thomas. David travels throughout China and India and we’ve been speaking to him on and off over the last few months about his presentation on the BRICs.
In fact, we had an advance screening of all the After America conference presentations this week. It’s been impressive. All our presenters and keynote speakers have put a lot of time and thought into what they’re going to say. It should be a great couple of days.
By the way, an advertisement in yesterday’s Markets and Money suggested the conference would begin next Tuesday. That was incorrect. Registration opens next Wednesday night with a cocktail party. Then the conference proper begins Thursday morning and runs through Friday afternoon.
We realise not everyone can make it to Sydney. It gets expensive once you start adding in hotels and flights. But don’t forget you can order a DVD of the whole show too. All the presentations and panel discussions will be recorded. Once the show’s over we’ll send the raw footage to an editor and get it out the door to you as soon as we can.
We know it’s a great time for this conference because there is no obvious theme dominating investment markets. Themes are like narratives put forth by various interested parties. They are big ideas that are supposed to explain the world for you and give you an idea of exactly what to do with your money.
In the last few years, the themes have been “The Commodities Super Cycle”, “The Stronger for Longer” theory of the resource boom, the “Global Financial Crisis” and others. The financial services sector likes big themes because big themes make it easier to sell investments related to them. The “growth markets” theme, for example, naturally leads to you buying stocks in the growth markets.
But a theme or narrative only works if it captures the imagination of investors and has enough to it to seem credible. Look around you right now and you’ll see there aren’t any convincing narratives. The zombification of the stock market by central banks is a theme killer. It produces a very tired narrative: buy US dollar denominated stocks and bonds.
We didn’t like that narrative the first time around. And we’re convinced it isn’t right. That’s why now is a great time to take a few days and discuss the investment world with our colleagues and guests. By the time a narrative or theme hits the papers, its old news.
You only really have an advantage as an investor if you know what the next narrative is…before everyone else. The only way to gain that kind of knowledge is to think more and think differently. That’s the goal of next week’s show.
In the meantime, what will happen to Australia if China’s economy grows less fast? Well, it doesn’t take a rocket scientist to figure that out. If China grows less fast, it means the glory days of the resource bull market are over. Lazy, passive, index-tracking investing won’t work anymore. You’ll have to think harder and spend more time on sector analysis and stock selection. And you’ll have to get the big ideas right.
for Markets and Money
From the Archives…
Carry Trade Currencies and the World’s Most Expensive Cities
2012-03-02 – Joel Bowman
Why the ECB and the Fed Have China Laughing
2012-03-01 – Greg Canavan
Burma’s Economy: The Next Big Story in Asia
2012-02-29 – Chris Mayer
Anatabloc – A Game-Changer in Medical Treatment
2012-02-28 – Patrick Cox
How Australian Banks Use Covered Bonds to Play a Dangerous Game
2012-02-27 – Dan Denning