Download March 31 - China Syndrome

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PORTFOLIO MANAGEMENT
Discretionary Portfolio Management
Spring 2004
Economic Commentary
China Syndrome
Portfolio Manager
D. Anthony G. Pringle, CFA
(416) 842-7067
[email protected]
Portfolio Manager
John M. Lewis
(416) 842-7034
[email protected]
Portfolio Manager
Douglas G. Dobson
(416) 842-7228
[email protected]
Investment Advisor
Caroline Daigneault, CFA
(416) 842-3257
[email protected]
Fax: (416) 842-7362
Toll-free: 1-800-561-4468
RBC Dominion Securities Inc.
BCE Place
181 Bay Street,
7th Floor
Toronto, Ontario M5J 2T3
2004 might be called the year of the
China Syndrome. With approximately
the same landmass as the USA, it has a
population of roughly 1.3 billion, about
4.5 times that of the USA. In a few short
years, it has transformed itself from an
under-developed country to a
manufacturing giant. China, and other
Indo-Asian countries are now massive
manufacturers of just about everything
for the world. The population is shifting
from rural agrarian to more urban. With
better paying jobs, workers are buying
homes, furnishings, and cars. This
consumption and household formation,
as well as their growing manufacturing
base, has turned China into a huge
consumer of resources and commodities.
For instance, China is now the second
largest importer of oil in the world,
behind the USA, and in 2003, it
consumed one half of the world’s
concrete. This is clearly a huge force in
motion, and as world citizens and
investors, we need to pay attention.
China’s remarkable growth and
development is helping Japan emerge
from its decade old economic slump.
China is very close to surpassing the
United States as Japan’s biggest trading
partner due to strong exports to China.
Stateside, the US economy is growing
well, fuelled by very loose money
conditions including low interest rates.
Tax cuts, and mortgage refinancing
continue to propel consumer spending
and new housing. Excess industrial
capacity due to over-investment in the
late 1990’s has kept job creation low
until recently. However the latest data
showed strong job creation and
confirmed the strength of the
economic recovery. This recent data
will improve George Bush’s chances of
re-election in November.
In the currency markets, pressure is
building for China to revalue its
currency, the Yuan, upward. It is
currently fixed to the US dollar, which
was fine until the massive amounts of
commodities it imports skyrocketed in
price. Due to trade flows, the fixed Yuan/
US dollar peg has put unwanted upward
pressure on the Euro and the Yen. We
think that a Yuan revaluation is coming,
and may have major negative
implications for US bonds and the US
dollar. To maintain its currency peg,
China currently has a huge appetite for
US bonds and dollars, which will likely
diminish after a revaluation. With
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massive current account and trade deficits continuing, and
budget deficits growing, we think that the US dollar may
have further downside versus other currencies.
Interest rates, currently at abnormally low levels, have begun
to move up in North America as evidence of economic
recovery mounts. As the weeks pass and growth continues,
we think that rates will move up, perhaps dramatically. The
massive stimulus created by the US authorities to re-start
their economy will likely produce increased inflation at
some point ahead.
levels, worldwide growth, and rising corporate profits, we
think this general trend is likely to continue. Many industries
will benefit from new demand for resources, commodities
and goods from the rapid expansion in China and the East.
However, many areas of the market have bounced back to
levels that appear to be beyond their fundamental value and
prospects. Looking at the horizon, we see some risks arising
from rising interest rates and the still unknown ramifications
of currency revaluation and devaluation. For the moment, on
balance, we are optimistic that the world wide economic
expansion will remain on track.
For this reason, we prefer to keep bond commitments short
term, and are wary of the interest sensitive areas of the stock
market, including income trusts. However, with several
countries of the world now growing well, and with rates at
historically low levels, we think it will be some time before
rising rates slow economic growth.
All in all, we remain optimistic that there will be good
opportunities in the market in the year ahead. The world is
enjoying its first synchronized recovery in ten years. As
always, we will do our best to protect your interests, and to
look for quality investments.
World stock markets have enjoyed a welcome rally. With
money supply very loose, interest rates at historically low
Tony Pringle, CFA
March 31, 2004
Canada & U.S. 10 Year Bonds
CRB Spot Commodity Prices
Index
320
7
300
6
280
260
5
240
4
220
200
3
99
00
01
02
03
Source: Federal Reserve Board, Statistics Canada
RBC Dominion Securities Inc.
04
99
00
01
02
03
04
Source: Commodity Research Bureau
is a member company of RBC Investments.
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