China – 8000 miles

China – 8,000 miles

I’m sat in the shadow of Beinn Resipol, a remote and moody monument in mountain form, close to Moidart in the Highlands of Scotland. Shanghai is around 8,000 miles away. Still, I can hear the sound of investor panic.

The following extracts from Bloomberg’s daily Economic Brief sum up what’s happening over there…

‘In the second quarter, China’s markets and economy were in a virtuous circle upward. In the third quarter, they are in a vicious spiral down. The Shanghai Composite Index fell 8.5 percent to 3,209.9 at the close on Monday. The index is now down 37 percent from its mid-June high and below the 3,500 mark that many investors expected the government to defend.’


‘All of the forces that accelerated market momentum on the way up are now working in reverse on the way down. The balance of outstanding margin loans has fallen to 1.4 trillion yuan, down from a peak of close to 2.3 trillion yuan in mid-June. The number of new trading accounts has slumped as the “greater fools” to whom speculators had hoped to offload stocks have wised up.’

I don’t doubt that some investors expected the Chinese government to defend stock prices but, for the life of me, I can’t figure out how the government could possibly succeed in so doing; I know of neither mechanism nor precedent. Of course, the government will do something. It will engage more easing – most likely in the form of reduced reserve requirements for banks – and that might go some way to settling investors. But it won’t sustain asset prices for long. And besides, the Chinese government has far larger fish to fry.

China’s economy is slowing. That’s not necessarily a bad thing. In fact, it’s something of a necessity if policymakers are to be successful in re-balancing the Dragon economy toward a more sustainable model – away from debt-fuelled investment on the one hand, toward higher household spending driven by rising incomes on the other. The alternative is worse – economies with over-sized investment tend to slow too, ultimately, but in a much more dramatic fashion. And that would be a disaster for the one party, in a one-party system, whose legitimacy is founded on lifting living-standards. So, the period of transition that China faces is a very difficult one indeed. Success, if it is successful, will be hard won.

In the meantime, China’s slowdown comes at a bad time for the global economy. Brazil and Russia are in decline, so too is Japan and the euro-zone is struggling to escape the doldrums. It seems a great many investors were counting on China – which, according to the Wall St Journal, ‘accounts for 15% of global output but has contributed up to half of global growth in recent years’ – to maintain some momentum.

That was always a dangerous assumption.

Steve Williams


You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email

China – 8000 miles2023-12-01T12:20:00+00:00

Investing: Q2 2015

Q2 – 2015

The second quarter (Q2) saw the domestic equity market fall 2.8% while the market for government bonds fell 2.6% in value. A portfolio composed of 60% equities and 40% bonds finished the quarter 2.6% lower.

Index 1 year 3 years 10 years Low Point Greatest Loss
FTSE100 0.2% 9.2% 6.3% Feb 2009 -39.8%
FTSE Gilts (5-15years) 7.4% 2.1% 5.6% Dec 2013 -6.7%
60-40 Portfolio 3.2% 6.5% 6.3% Feb 2009 -20.4%
LIBOR (3 months) 0.6% 0.6% 2.3%
Consumer Price Index 0.3% 1.5% 2.5%

Taking a longer term view, and given a minimum of 7 years for investment, we look for returns from the FTSE 100 Index to lie somewhere between 6.9% and 10.1% per annum. The most recent decade (from 30 June 2005 to 30 June 2015) is characterised by a return of 6.3%, outside of the lower end of our range. That makes good sense when one considers that the starting and ending points in that period coincide with a maturing bull market in 2005 and some volatility today.

Our hypothetical 60-40 portfolio, comprising 60% in the FTSE 100 Index and 40% in the FTSE Gilts (5-15 years) Index, has gained 3.2% over the last 12 months, 6.5% p.a. in the last 3 years and 6.3% p.a. over the 10 year period. Adjusting those figures for inflation gives us a healthy set of real returns of 2.9%., 4.9% p.a., and 3.7% p.a. respectively.

Those positive inflation-adjusted returns are particularly pleasing when we consider that cash investments have, somewhat unusually, lost ground relative to inflation – a result of 6 years of unprecedented monetary easing.

The last year is characterised by a mixed set of results with the US and Japan performing strongly. Meanwhile relatively low returns have been provided by markets in Asia, Europe and developing world.

Steve Williams

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email

Investing: Q2 20152023-12-01T12:20:14+00:00

What about China?


What about China?

For some time now, I’ve been complaining about the oversized contribution from investment in China’s recent expansion

[1]. Actually, I’m not the only one. Policymakers are busily crafting the conditions that might bring about a rebalanced economy – one less reliant on exports & investment and more reliant on domestic demand & consumer spending.

The IMF might be right Chinese Puzzle

‘Investment growth in China declined in the third quarter of 2014, and leading indicators point to a further slowdown. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation. Slower growth in China will also have important regional effects, which partly explains the downward revisions to growth in much of emerging Asia.’ WEO January 2015.

Building more and more factories to house more and more machinery manned by more and more workers will get you a long way; China’s economy is not far off 40 times larger than it was in 1978 when Deng Xiaoping succeeded Mao Zedong. But while ultra-high levels of investment are associated with rapid expansion they’re not generally associated with sustained growth. The returns that are associated with an over-reliance on debt-fuelled investment diminish with time (thanks in part to an inevitable inefficient use of capital) while the risks are amplified (owing to overleverage and rising volumes of non-performing loans).

China, I suggest, has a debt problem – today’s Financial Times reports that ‘Chinese corporations are now among the most indebted in the world’ – but with everything else that is going on in the world[2] investors are not yet fully alive to the possibility of a much slower pace of growth. Indeed the huge premium that the market for Chinese A shares (dominated by domestic investors, it has risen in value by over 60% in the last 6 months) has over the market for B shares (dominated by international investors, it has risen in value by a much less thrilling 19% over the same period) suggests that Chinese investors are most hopeful of sustained high growth rates.

So far as I can see, two paths are apparent; China’s rate of growth can slow in orderly form or disorderly form, but it will slow nevertheless.

Steve Williams

[1] Post 2008 in particular, where gross fixed capital formation has accounted for around half of the Chinese economy[2] It’s all so exciting; an extraordinary oil price decline, huge gulfs in monetary policy between those in the US and Europe, Syriza’s rise to power in Greece, another full-blown Russian crisis and Japanese policymakers throwing everything, including the kitchen sink, in a spectacular attempt to kick-start their economy

What about China?2023-12-01T12:39:57+00:00

When the clouds are seen


Here is a piece by Steve Williams of Cormorant Capital Strategies. Steve helps me with the investment committee and provides invaluable impartial and independent external expertise.

When the clouds are seen

The October edition of the International Monetary Fund’s (IMF) World Economic Outlook reveals an expectation for global growth to amount to 3.3% in 2014 and 3.8% in 2015. That compares with growth in the Emerging Market and Developing Economies which is expected to reach 4.4% and 5.0% respectively.

If the IMF are right, the remainder of the year will see the fastest pace of expansion, among the emerging market economies, in Asia (6.5%). Asian growth will eclipse that in Emerging and Developing Europe (2.7%), Latin America (1.3%) and the Middle East (2.7%). Only Sub Saharan Africa (with output expanding at 5.1%) will see growth at anything like the pace set by Asia. Asia’s charge into the lead is boosted, in part, by an improved outlook for India… cloudatlasposter

‘In India, growth is expected to increase in the rest of 2014 and 2015, as exports and investment continue to pick up and more than offset the effect of an unfavorable

[sic] monsoon on agricultural growth earlier in the year.’
I’m a little less certain that India can prevail in the next few years – high levels of corruption and stalled infrastructure improvements represent formidable barriers. But there are good reasons to be optimistic.

Foremost among them is the incumbency of the impressive Mr Raghuram Rajan as Governor of the Reserve Bank of India. Presenting him with the award for Best Central Bank Governor of 2014, Euromoney explained that ‘his tough monetary medicine combatted the storm ravaging the deficit-ridden economy in the recent emerging market crisis’. Indeed, I suspect the Indian central bank’s performance during the ‘taper tantrum’ did much to deflate fears that were apparent well beyond the boundaries of the sub-continent.

In addition, assuming that slowing global growth keeps a lid on commodity prices, India’s high rate of inflation will slow without the need for tighter monetary policy thereby affording India’s central bank the opportunity to underwrite faster growth. In any case investors in the emerging markets must be cognisant of the risks they face.

Most notable among them is the threat from a reversal of the flow of cheap capital that these economies have enjoyed in the last few years as central banks in the West supported liquidity. Just such a reversal is already underway. Beginning in May last year – when Ben Bernanke, then Chairman of the Federal Reserve, first mooted some tapering in the pace of its stimulus package – the MSCI Emerging Market index has underperformed the MSCI World Index by 10% having shed and then regained close to a fifth of its value along the way.

Steve Williams


When the clouds are seen2023-12-01T12:39:33+00:00
Go to Top