Chinese policy change may offer strong future investment returns

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By Daleen van Wyk, Communication Strategist

All long term investors fantasize about the one investment that will deliver spectacular returns in the long term. An investment in that one share, fund, region or industry that years later is worth a fortune compared to the initial investment.

Investing in China now may just be such an opportunity.

Considering the volatility and drop in share prices that a decline in economic activity in China and resultant lower demand for a range of products and services delivered to all global markets this year, that may seem like an almost ridiculous notion.

However, one rather significant recent policy change in China could deliver exactly that years from now. The country announced in October that its much publicized and analysed ‘one child’ policy is scrapped and couples will now be allowed to have two children. Before this policy revision, China was on track to surpass Japan and become home to the world’s most elderly population in less than 15 years, with an estimated 400 million people older than 60.

Keith Fitz-Gerald of Total Wealth Research in the USA refers to this as “the gutsiest move yet in the ongoing global financial crisis. It is a game changer of the highest magnitude. And great news for savvy investors.”

“In 1975, there were three people living in emerging market countries for every one in a developed country. By 2009, that had changed to 4.7 people in emerging market countries for every one in a developed country. By 2050, the figure will be 7.5 to 1. That’s a huge shift only 36 years from now.

“Which means, by implication, now’s the time to act if you really want to make a fortune,” says Fitz-Gerald.

China’s middle class has overtaken the United States to become the world’s largest, according to a report on global wealth released by Credit Suisse in October. This report states that the Chinese middle class now stands at 109 million, compared to 92 million in the US. Once the effect of the change in the one child policy becomes a reality it is expected that between 75 and 100 million people will be added to the Chinese workforce by 2030.

“A bigger workforce will not only drive productivity, it will also drive consumption,” notes Fitz-Gerald.

Figures show that the Chinese economy is 25 times bigger than it was in 1990. By 2035 it could double again, especially if the 75 to 100 million people who would have literally been prevented from being born are added.

This will drive not only currently relatively unknown companies it China itself but also global brands like Nike, Starbucks and Apple to levels investors can maybe not imagine at the moment. Companies like Meizu and Xiaomi (makers of phone handsets) are mostly unknown outside China but could very well become global brands to follow.

Business Day reported recently that South African company Remgro is one that already has a long term view of China in place through investment in the China-focused Milestone fund. It was reported from the company’s recent annual general meeting that Remgro has a new arrangement in place to allow it to participate in the longer term in promising Chinese businesses.

A key factor to bear in mind that the returns will not be instant, considering how events in China weighed in on markets around the world in 2015. This is likely to continue well into 2016. Bloomberg reported on another report by Credit Suisse in which the company cautioned that a cut in investment spending in China – and the return of US core inflation – could derail the global economy next year.

Those who truly understand that investment is a long term pursuit should now start searching for investments that will provide exposure to the huge consumer market to develop in China in the next ten to twenty years to get ahead of the herd. And then wait. Note this closing remark by Total Wealth Research’s Fitz-Gerald: “Over time things will begin to settle down as part of the maturation process as China’s legal, financial and economic systems catch up. That is when capital growth really sets in.”

View the graphs to see the performance of two funds for the past five years – The Templeton China Fund and iShares MSCI China ETF. The Brenthurst investment strategy team will keep a close eye on developments in China to include appropriate funds in portfolios where future returns can be expected.


Business Day

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