Goldilocks Investment Conditions

Its time to balance up the bad news with some good news.

The world is worried about China. Some say…We will be brought to our knees because their economy is no longer growing at 7.5% compound. It’s an irrefutable fact that the Chinese economy is slowing down, but since they regularly engineer their economic results it’s very hard to say with any accuracy, just where it was, just where it is and just where it’s going. The projection is 6.8%, which doesn’t look like a disaster to me.

American commentators are worried that many global companies will struggle to make large profits in the future if the Chinese can’t afford to buy anything anymore. That’s not news. What is news is that the Chinese Authorities have finally found something they can’t control. It has to remain that way. We sold our Chinese funds because Im not happy investing where a Communist regime can control things.

Should we care? Robert Peston at the BBC seems to think so, but frankly I’m not as worried. Firstly I don’t get paid to be a cross between a drama queen and a scaremonger. I get paid to assess the facts, take action and not get overly dramatic during the process.

So judging by some investors recent actions, they must feel that with the Chinese economy supposedly struggling, that there will be nobody left to buy the worlds goods anymore. For those investors I have two questions.

What did investors worry about before they worried about China’s slowdown?

Here’s an interesting fact. There has never been a time in the last 100 years where we haven’t had our armed forces involved in an overseas conflict. So no point waiting for war to end before we invest. Before investors worried about China’s slowdown, they had other things to worry about.

The UK General Election
Vladimir Putin & the aggression in the Ukraine
Greek Debt – Parts 1,2,3 & 4
Kim Jong-un & his Missiles
Irans Nuclear pretentions
Arab Israeli hostilities
Osama Bin Laden & Al Qaeda
Muammar Gaddafi
Saddam Hussein & The Weapons of Mass Destruction
OPEC’s cartel and the ever increasing price of Oil
Oil running out
An Oil glut
The price of oil crashing
House price inflation
House prices falling
Northern Rock
Lehman Bros.
Banks extortionate profits
Securitised Debt Obligations
Interest Rates Rising
China Overheating (hard to believe now worries centre on the Chinese Slowdown)

We never will have “Goldilocks Investment Conditions”, they simply don’t exist. Whilst many individuals worry and are worked up into a frenzy, patient investors just invest patiently.

Who bought the worlds goods before the Chinese supposedly bought up everything?

Since WWII it has been the American consumers. Us Europeans did our bit too. So is there any chance we won’t need the Chinese to buy all the worlds manufactured goods in the future?

Well an interesting set of conditions are appearing in the U.S. and the UK.

  • Life support given by quantitive easing has finished. The next direction for interest rates will be upwards. That’s a good thing, it confirms economic recovery is robust.
  • Unemployment is way down, debt is down.
  • Wages are rising, house prices are rising.
  • Consumers are benefitting from the fall in oil prices

Try to find an empty restaurant, or car dealership or shopping complex. Most working people have a bit more “Jangle in their pockets” and they are no longer afraid to spend it.

Low energy costs alone have reduced inflation to zero, something the Bank of England couldn’t manage to achieve in 5 years of trying. This unexpected regular cash windfall seems to be a more effective stimulus to the economy than all the Quantitive Easing added together. Because these savings are all going to the man in the street, not to the banks.

It may seem something or nothing, but the savings we are seeing on fuel costs have created an interesting statistic. The fastest growing economy in the Eurozone in the first quarter was – Greece. Honestly you can’t make this up. All the debt management in the world has been defeated by the Greek people just having a few extra Euros left to spend on themselves and their families.

This consumer benefit is being spent and is boosting economies locally. With so much U.S. fracking moth-balled until oil prices climb a little, I don’t expect to see oil at $100 any time soon. OPEC’s stranglehold over us is dead. Saudi Arabia is starting to borrow money, it knows it will be needed in the long term once their cash reserves have disappeared.

Most businesses won’t need the Chinese masses as we have our own consumers.

Do we have to fear the worlds larger stock markets falling?

As Brits, we watch the FTSE100 index. The FTSE100 has suffered badly, but I have written before about why that index is no indicator of individuals investment returns. Since our last valuation was sent on 6th July the FTSE100 has fallen over 8%. Our moderate portfolio is just over 2% lower. Now today will be lower again, but the ratio will remain the same. A 5% fall in the FTSE 100 just doesn’t equate to a 5% fall in our Moderate portfolio.

To remain healthy, stock markets require small corrections periodically. The alternative is these corrections don’t occur and full blown bubbles build which eventually pop dramatically. We will be taking this opportunity to re-arrange our portfolios, hopefully bagging some bargains.

The scores on the doors.

After “The worst week for markets ever, ever, ever”, and the headlines which will undoubtedly follow in the next day or so, I thought it was an opportune time to confirm why we shouldn’t worry about the short term which is always based on the toss of a coin. We need to concentrate on long term results. Here’s a short film on how our Moderate portfolio has done, along with some soothing music. Investments tend to go up 3 out of 4 years. Even if this year is a negative, (It would still need to fall significantly from here for that to be true) long term returns will remain comfortably ahead of cash returns and inflation.

QUESTION 1: The alternative to China slowing down is that China continues to grow at 7.5% per annum. They become stronger and stronger as a nation. Do we want to see that?

QUESTION 2: We did rather well by investing in China but pulling out. As of Friday we could buy the exact same China fund as we sold at the price we paid for it in October 2014. I think it’s clear why I haven’t been tempted to invest again.

10 Replies to “Goldilocks Investment Conditions”

  1. Well said Howard. That is a very sobering article and a very comforting assessment.

  2. Spot on as ever Mr Scott, and reported with sound confidence and not a hint of histrionics.

  3. China is to allow its state pension fund (£349bn) to invest in domestic stocks.
    In an open system it would be dividend yielding stocks. Perhaps China will come into play again, who knows?
    It will be interesting to watch the price of 3 dividend yielding stocks: Giant Interactive, China Mobile and Chungwha, for any up tick.
    Over to you Howard!

    1. Hi Dick

      I’m always open to opportunities wherever they appear. This is the first blip in ages. I’m sure some babies have been thrown out with the bath water in China. A command economy that doesn’t respond to commands isn’t good though.

      We look to have returned to risk on/risk off again. With European QE, a recent turnaround in the Euro and some indiscriminate selling I think we could achieve a safer rebound in the Dax.

      Thanks again for taking the trouble to comment.


  4. Another informative article. I look forward to your blogs and resist the urge to thrust them under the noses of my colleagues choosing instead, to keep the ‘good stuff’ for myself.

  5. Very Very interesting , at least I can understand what you are talking about , good advice Howard .

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