As China's economy cools, a focus on the longer term
November 1, 2012
China’s economy is creating headlines nearly every day. Markets are saturated with analyses of China’s slowing economy, the country’s complicated political environment, or just about any other aspect of Chinese economic life. Indeed, the constant media coverage is understandable, considering China’s enormous contribution to global economic output.
In light of this never-ending scrutiny, we believe investors would be wise to take a step back and put China’s recent slowdown in perspective. The most bearish of forecasters are estimating that Chinese economic growth could slow to an annual rate of somewhere around 4% (source: International Monetary Fund). Does this level of growth indicate a permanently disabled economic system? While we acknowledge that China’s economy is imperfect in several respects, we believe the answer to this question is no. We’d argue that growth in the 4% range could realistically be viewed as a noble pace, particularly in light of the persistent problems that are hampering growth in many parts of the world. Furthermore, we note that government officials, in our view, are highly likely to use stimulus measures to prevent a full-fledged economic freefall.
Another bit of perspective is provided by looking back in time: China's economy has been growing at 9 - 10% for 20 years or so, and it’s hard to fathom an economic engine that could sustain such growth forever. In fact, we believe that a period of economic cooling could possibly result in a better — more stable, more balanced — long-term economic picture.
Ultimately, we are strong believers in China’s potential, and we believe that favorable investment opportunities will continue to appear within the country’s borders.
As many analysts have pointed out, billions of people are joining China’s burgeoning middle class, and the long-held image of China as the world’s manufacturer is giving way to a new reality in which China’s consumer class takes a bigger share of the limelight. This is a dynamic that is firmly in place, and we will therefore look to domestic consumption as a driver of business activity. With that focus in mind, companies that serve China’s consumer-driven economy will be among those that we seriously consider as we seek opportunities for investment.
According to many indicators, China’s economy is likely headed for a sustained period of relatively slow growth. Despite what could be a rocky period of adjustment, it’s worth keeping in mind that this downturn comes on the back of a dynamic and prolonged economic expansion, with the consumer segment playing a notable role. Appetites for luxury goods provide an indication of this growth.
Data: Financial Times, July 2012; Prada Company, May 2012, most recent data available.
Other factors that influence our view include the following:
- Investing in China is not without its share of low-visibility areas. A general lack of transparency poses a persistent challenge, and many investors find this to be a significant source of discomfort. We therefore favor areas in which we see (1) secular growth, (2) assets that are difficult to replace (or unlikely to be rendered obsolete), and (3) enterprises that we believe are managed well. All along, we pursue companies that show high potential to perform consistently despite the ebb and flow of macro-level developments.
- Following our long-standing practice, we invest with an ownership mindset. This means that we pursue a high degree of insight into each company’s operations, financial condition, and ultimate competitive advantage. We believe this nuts-and-bolts approach is important in any country we invest in, but even more so within the vast and contoured structure of Chinese markets.
Notwithstanding investors’ reaction to the stream of daily news, we remain disciplined in implementing our investment process — in China or in any other part of the world that we cover. We aim to continue investing in companies that we believe have strong franchise sustainability, long-term earnings power, and valuations that are at significant discounts to our estimates of their intrinsic value.
Tools and resources
Many investors have little experience investing in equity markets within emerging markets. At Delaware Investments, a seasoned team of investment professionals provides coverage of these markets, seeking to identify businesses with strong franchises and positive long-term growth prospects.
The team manages Delaware Emerging Markets Fund, a fund that seeks long-term capital appreciation by investing in equity securities issued by companies that are domiciled in — or that derive a significant portion of revenues from — developing nations.
The views expressed represent the Manager’s assessment of the market environment as of November 2012, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s current views.
Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting delawarefunds.com/literature or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.
IMPORTANT RISK CONSIDERATIONS
Investing involves risk, including the possible loss of principal.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.
Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
Diversification may not protect against market risk.