It is tempting to be pessimistic about the outlook for global equity markets in the current environment. The threat of recession looms in the US, the world’s largest economy, as surging inflation, and the fastest increase in interest rates in 40 years take their toll. Global markets have struggled since hitting a peak in late 2021. The MSCI All Country World index is down 14% from its peak reached on 12th November 2021. Yet, opportunities abound, helped by the fact that GDP growth of various geographic regions has seldom been less synchronised. Differing responses to the Covid pandemic and the uneven impact of the Ukraine War have caused economies to grow and retreat at different times, very different from the norm of relatively synchronised growth. While the US is slowing, being the first major economy to start hiking interest rates, growth in the Eurozone is accelerating due to war-related fiscal support and the unexpectedly large retreat in energy prices.

China is exhibiting the most significant acceleration in GDP growth as her economy awakens from hibernation. The lifting of severe Covid restrictions has unlocked pent-up consumer demand for goods and services. At the same time, government has put a temporary halt to its meddling with private sector business. China’s GDP grew by only 3% in 2022 during its year of hibernation, the slowest growth since the 1980s but is expected to grow by around 6% in 2023. Meanwhile, consumer price inflation is only 0.7% in China.

First quarter (Q1) GDP beat already elevated expectations, helped by rising consumer confidence and expenditure of accumulated savings, especially in the services sector. GDP growth accelerated to 4.5% year-on-year in Q1, up from 2.9% in Q4 last year, and well above the consensus forecast of 4.0%. GDP output is now 6.8% above its recent low point in Q2 2022. Property sector investment continued to decline but housing demand began to recover, helping house prices to increase at their strongest pace in 21 months. Monthly economic data since quarter-end point to further gains in economic momentum, including upbeat purchasing managers’ indices (PMIs), strengthening consumer confidence and rising credit growth. Services and construction PMIs hit decade highs in April.

Encouragingly, China’s current growth rate is more organic than usual. The massive stimulus programmes of past economic cycles are missing. This is good news, as it is likely that imbalances from excessive credit expansion and over-investment in housing, infrastructure, and industrial capacity, will be avoided. It means, of course that economic growth will be slower, unlike the heady days of 8%-plus growth, but it also points to greater sustainability. Moreover, current GDP growth is occurring in the absence of any export recovery. The traditional drivers of China’s GDP growth: housing, exports, and investment spending, are all relatively subdued, which means the economy is maturing and relying more on consumer spending and the demand for services.

China pessimists cite geopolitical risks and the decoupling of China from the West, and the impact this may have on economic activity. Others cite the country’s demographics and the rapidly shrinking and ageing population. The two trends are intertwined. A rapidly ageing population will increase the dependency ratio (children and retirees divided by the working age population) and lead to a drop in the savings rate, which according to Independent research firm, MRB Partners, means: “Regardless of geopolitical tensions and increasing deglobalisation, demographics dictate that China will continue opening its economy and capital markets to foreign investors…… Policymakers have been preparing the ground for a more open capital account, because in future China will need to borrow capital from the rest of the world.”

Regarding demographics, MRB Partners make the following observation: “That China’s demographic structure will cause the trend of its GDP growth to decline is a given…. However, the fact that the share of its service sector in GDP will continue to increase as incomes rise and the population ages is a strong tailwind for Chinese corporate earnings growth.” Another interesting point is that despite China’s ageing population, the country is not yet fully urbanised. The United Nations forecasts that people living in cities with populations exceeding five million will increase from 208 million in 2020 to 280 million in 2030, bringing numerous economic spin-offs and considerable relief to the over-extended property sector.

In an article we wrote in October 2022, titled “Is China becoming un-investable?”, prompted by government crackdowns on the internet sector and a persistent Covid-zero policy, we concluded that “China is unlikely to ever become un-investable. Its economy is too dependent on trade and integral to the world economy for either its own or for foreign governments to render it so…. Current valuations almost guarantee superior returns.” MRB Partners, in their “Long-Term Returns” report, dated 17th November 2022, forecast China’s GDP growth will achieve 3.8% per annum in the decade from 2022-2032, much lower than the 6.7% annual growth in the prior decade, but enough according to their forecasts to generate the world’s strongest equity market returns.

There will be positive spin-offs for the entire Pacific region, benefitting Japan, developed Far Eastern and emerging Far Eastern markets, which like China are all cheap compared to their long-term averages and at multi-decade lows compared with the relatively expensive US market. Overberg Asset Management has significant weighting to China and the Asia-Pacific region in its privately managed global share portfolios including holdings in: Fidelity China Special Situations, VinaCapital Vietnam Opportunity, Schroder Asia Pacific, Schroder Oriental Income and Baillie Gifford Japan, all investment companies listed on the London Stock Exchange.