A big(ger) world out there
Hints of improvements in China recently trumped reports of actual progress in the U.S. economy as financial markets served a reminder that the world’s No. 2 economy keeps gaining stature.
An August report from the U.S. Bureau of Economic Analysis showed the Great Recession wasn’t as bad as previously believed and that the U.S. economy is growing faster than expected. But what caught investors’ fancy was an official report from China the same day contending that the economy there was stabilizing after months of slowing.
One reason investors are more sensitive to the growth rate in China is the size of its population – more than 1.3 billion people, the most in the world, more than four times the U.S. population.
Another draw is growth rate. The Chinese economy is little more than half the size of the U.S. gross domestic product, but it’s expanding at more than triple the rate – 7.8% in 2012, adjusted for inflation, vs. 2.2% for the U.S.
“Many people are worrying about growth in China slowing to 7% per year, but extrapolate that out 10 years and think of how much bigger a part of the global economy the Chinese are going to be,” Art Rothschild, vice president at Landaas & Company, said in a recent Money Talk Podcast.
In the mature U.S. economy, sluggish wage growth and high unemployment have accompanied slow economic growth, Art noted.
“We should get used to it. I think it’s the way it’s going to be,” Art said. “But we should look at the profits of U.S. multinational companies, which I think are going to continue to grow because of this global growth of consumerism in places like China and India long-term. Stock investors who are patient can do quite well over the long haul, without regard to any short-term volatility.”
For years, Bob Landaas, president of Landaas & Company, has been talking about the increasing proportion of U.S. corporate profits coming from overseas, and he has been citing World Bank forecasts of the middle class in developing nations tripling by 2030.
“As we see their per-capita income increase, and they pass the tipping point at which they are able to feed and shelter their families, they have disposable income. That’s what’s going to give financial markets this next leg,” Bob said. “Not to sound like a cheerleader, but the U.S. kind of invented the game of consumerism. So their next act has to be increased consumption. And that’s where we win the prize.”
Indeed, a recent study suggests the number of people in Asia who can afford to spend between $10 and $100 daily will reach 1.7 billion by 2020, more than triple the numbers in 2009.
Already, Chinese demand for new automobiles is so great that some areas are having lotteries for licenses.
“There’s no reason we can’t make money on that too,” said Brian Kilb, executive vice president and chief operating officer at Landaas & Company. “We have auto manufacturers doing lots of business. So if U.S. growth tapers, we’ll go make money overseas. There are places to take advantage of and participate in the growth of that middle class and that growing consumerism worldwide.”
Long-term investors would be mistaken to focus too narrowly on U.S. prospects. Although international investments often contain additional risks, such as those involving currency exchange rates and sociopolitical events, balanced in a diversified portfolio, they position investors to benefit from swifter global growth in the long run.
Joel Dresang is vice president at Landaas & Company.
(initially posted Aug. 8, 2013)
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