Asian markets rallied strongly yesterday, with the Shanghai Composite closing at the best level in almost a month. The index is now up around 20% year to date, and more when measured in Aussie dollar terms. This is far ahead of the ASX 200, despite China announcing its worst growth numbers in almost three decades, as the trade war takes an increasing toll on the Chinese economy. The index is just shy of the 3,000 mark, and bullish sentiment may push it over that level in the not too distant future.

This highlights the importance of investing internationally, instead of having all your assets in Australia. The underperformance of many Aussie investors looks even worse if you compare the Shanghai Composite to commonly held Aussie stocks like the big four banks. Despite positive tailwinds like the government’s response to the royal commission, Australia’s banks have done far worse than a Chinese index that has battled tough headwinds all year. You also have an opportunity to outperform the index, as some of the stocks which we selected for model portfolios in our international investing platform, Macrovue, have significantly outperformed their benchmark. One of these is Tencent, a company that is up 1227% over the past 10 years and is only just starting its growth run.

One other positive recent development is the liberalisation of Chinese interest rates, which has been viewed well by the market. This interest rate liberalisation is part of a process towards a free-floating yuan. If the yuan was free floated today, it would significantly reduce the purchasing power of Chinese consumers through yuan depreciation, thus increasing the country’s trade surplus. Nevertheless, it would also increase the offshore debt burden of Chinese developers, potentially triggering mass government bailouts and a property sector collapse, driving Chinese growth to a halt under a worst-case scenario. To avert a currency crisis, China is likely to move towards a free-floating yuan in small steps, and it is unlikely to be a key factor in this current trade war.

 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

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September 9, 2019