Most Americans are expecting a recession by the end of 2020.
All that they can see are high stock valuations, low interest rates that don’t generate enough growth, geopolitical tensions that are rising, and honestly, how much more buyback activity and index inflows can we really expect? (In fact, in this article it's discussed how the momentum-based approach of passive investing could kill real economic growth.)
These conditions bring all of us to question; where is it best to invest in the coming years?
The Key To Investing In The 2020s
Right now, maybe more so than ever before, is it critical to geographically diversify your portfolio. This isn’t just about adding an emerging markets ETF, you should want to dig a little deeper than that. I’m going to help you out in doing so today.
To start off with the thesis for this article. Look at the following image:
Source: Visual Capitalist
The first thing that you’ll notice, is that by 2030, 6 out of the 10 largest economies will be Asian. More so than that, most major economies align themselves with Asia/China.
Looking beyond the top 10, in the 50 largest economies, you can see the incredible growth of previously neglected economies in this region as well (OECD list of largest economies in the future).
The World’s Greatest Infrastructure Project
One of the key drivers of growth for these neglected economies is the BRI, the Belt & Road Initiative. A multi-trillion project initiated by the Chinese government, which supports the accelerated development of these countries and the integration of Asia as a whole.
Just have a look at this map:
Source: OECD BRI Report
This image shows the new Silk Road Economic Belt, the 21st Century Maritime Silk Road, as well as the locations of significant infrastructure investments.
I have discussed the Chinese economy for a long time, and the differences that are most frequently misunderstood by Western investors. In fact, I live half the year in China, seeing every detail firsthand.
If there’s one thing I have learned during my years of living in China, is to never underestimate how well the government can execute their economic vision.
Why Would China Undertake Such A Capital-Intensive Program?
To understand why the Chinese government wants to take on such a massive project, probably the largest infrastructure project in human history, it’s best to understand their reasoning.
As a result of the incredible growth in China, the standards of living have increased as well, and so have wages. Labor is becoming increasingly more expensive, yet the country does not want to lose its position as the world’s manufacturing hub.
The BRI is building an ecosystem that includes neighboring economies to have access to lower labor costs, in an effort to maintain the world’s manufacturing opportunity. Of course, there are many more reasons than just lower labor costs, but that would make this article too long.
The important thing to think about is that the BRI is about the next wave of growth for Asia, and China is just the middle stage in the project. There are 2.5 billion people in Southern Asia, with younger average age and a higher growth rate. The empowerment of this entire region will fundamentally change the world economy.
Thought Differences With The West
Understanding business and culture in the East is not easy, hence why I want to give you a few simple examples of traditional thoughts that have become outdated, as well as key fundamental differences in approaching business.
Publicly listed companies in Western countries frequently have a focus on next quarter’s earnings and maximizing shareholder values. Most public companies in Asia are either state or family-owned. This is important as the latter has a greater focus on top-line growth and its long-term vision.
The old Asian strategy of copy-and-improve is long gone. As of right now, China has the largest and best online infrastructure in the world. It’s technology companies have become the leaders in mobile payments, social networking, artificial intelligence, mobile networks, and quantum computing.
Western retail investors say that corruption in Southern Asian countries makes it too dangerous to invest, but most institutional investors accept corruption if there is growth to pay for it. Many older generations simply won’t adapt to this view though, but younger generations have a better understanding.
The BRI initiative is not about owning other countries through big loans that are at risk of being defaulted upon. Western colonial logic is not in play anymore. China’s focus is on protecting economic interests.
Western nations are critical of the involvement of the Chinese government in the private sector but are not realizing how advantageous it is to fast growth to have local government allocating economic resources to enterprises. The model has worked well for China, which does not mean that it’s replicable across other regions,
Capital Allocation Decisions Follow The Economics
The importance of effective capital allocation is also seen in the investment decisions for the five key disruptive industries. These are shown below:
The five key disruptive technologies for the future
All 5 industries and 30 sectors are critically important for the future, yet China decides to primarily invest in those with the most economic importance. Most sectors related to health, services, and biotechnology are being imported from other countries. The reasoning for this is very simple: these sectors require a large amount of capital spend, a high investment risk, a long R&D cycle, and slow commercialization. Hence it is easier to import them, as they are not as critical to economic growth as the others.
Different Ways In Which You Can Invest
- Individual Chinese stocks that focus on artificial intelligence, e-commerce, and social networking: Baidu BIDU, Alibaba BABA, and Tencent TCEHY
- Alternatively, you can gain exposure to the BAT stocks through these two ETFs: KraneShares CSI China Internet ETF (KWEB) and Invesco China Technology ETF (CQQQ). The latter option is more diversified with twice as many holdings.
- COSCO Shipping (1919:HK) and China Merchant Port Holdings (144:HK) own key ports along the 21st maritime silk road.
- ABB Robotics ABB and Siemens AG GR are amongst the most disruptive forces in the Industry 4.0 revolution. China will heavily invest in more efficient manufacturing processes as a cause of rising wages.
- ETFs for specific SouthEast Asian regions are the Market Vectors Indonesia Index ETF (IDX), the iShares MSCI Malaysia Index ETF (EWM), the iShares MSCI Thailand Capped Investable Market Index ETF (THD), the iShares MSCI Singapore Index ETF (EWS), and the iShares MSCI Philippines Investable Market Index ETF (EPHE).
- The contestants are not just foreign companies. US industry giants Caterpillar CAT and John Deere DE produce the machinery to develop the infrastructure necessary.
- Subscribers to Countach Research can download the PDF to see the list of Eastern European (most attractive), ME, and SouthEast Asian individual stocks, and their ADR tickers for US investors. Log in to access.
What Else To Read:
These are a few of the suggestions for interesting reads. If you like to read more, please write so in the comments below and I’ll add more links.
- Ray Dalio, the founder of $160-billion AUM Bridgewater Capital, shared multiple research papers on China, explaining his bullish view. You can read all his papers on China here. In relation to this article, I recommend you read this article on the importance of geographic diversification.
- Book 1: The New Silk Roads: The Present and Future of the World by Peter Frankopan
- Book 2: Connectography: Mapping the Future of Global Civilization by Parag Khanna
- Book 3: The Future is Asian: Global Order in the 21st Century by Parag Khanna
- Book 4: The Dawn of Eurasia: On the Trail of the New World Order by Bruno Maçães
- Book 5: AI Superpowers: China, Silicon Valley, and the New World Order by Kai-Fu Lee
- The Countach Research blog that consistently posts new analysis and insights.
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