China's pain is our gain
The nation's bumpy transition from an export-driven machine to a more consumer-oriented economy is likely to be good news for some investors.
By Howard R. Gold, MoneyShow.com
When President Barack Obama meets new Chinese president Xi Jinping in California on Friday, it will be a big contrast from his first official meeting with the previous leader, Hu Jintao, in April 2009.
Then, China was still basking in the afterglow of the 2008 Beijing Olympics, where its spectacular opening ceremonies and its pace-setting 51 gold medals declared that China had arrived on the world stage.
China responded to the financial crisis with a massive stimulus package that focused heavily on infrastructure and construction. That kept its GDP growing in the high single digits, while the developed world was heading south. When the global economy began recovering, China's real GDP growth topped 10% in 2010.
But last year, China's GDP growth was 7.8%, the weakest since 1999, and it will probably match that this year. The Conference Board projects China's GDP growth will average 5.8% from 2013 to 2018, and a mere 3.7% from 2019 to 2025.
That may seem pretty good compared with the developed world (U.S. GDP growth may chug along at 2% or so), but China's GDP has grown by about 10% on average since Deng Xiaoping unleashed capitalism three decades ago. And Chinese leaders have viewed 8% growth as a bare minimum to stave off social unrest.
Nonetheless, China's new leadership has declared the days of rapid economic growth over, and Xi plans to carry out the long-anticipated "rebalancing" from an export-driven machine to a more consumer-oriented economy, and to deal with China's looming environmental nightmare. So, the next few years probably will be pretty rocky.
But China's bumpy transition is likely to be good news for many U.S. companies and U.S.-focused investors. Companies that use raw materials should do well, because their costs will go down, giving earnings a nice boost. That's why, as I've written here for years, solid blue-chip US stocks should continue to outpace once-invincible emerging markets, especially China.
But commodities producers, resource-intensive economies, and commodity currencies will be hurt. Hyperinflationists, gold bugs, and commodities supercycle true believers will share China's pain.
This would be a huge reversal from the 2000s, when China's rapid growth, along with the mid-decade housing construction boom in the US, bid up commodities prices. The Thomson Reuters/Jefferies CRB index soared more than 270% from its July 1999 low to its recent April 2011 peak. It has dropped about 23% since then, in bear market territory.
Copper prices sit at three-year lows. Aluminum, tin, iron ore, nickel, and zinc have plunged from their 2007 bubble peaks. Coal and crude oil also are lower. Only some agricultural commodities have held up.
And then there are precious metals. Gold hit an intraday high around $1,920 an ounce in September 2011, while silver peaked near $50 in the buying panic of April 2011. At about $1,400 an ounce, gold has dropped 27% from its high, while silver has lost more than half its value from its bubble peak two years ago.
Why? There's no sign of real inflation, let alone the hyperinflation long predicted by the likes of Dr. Marc Faber and Peter Schiff. Demand in the Eurozone is depressed and the recovery in the US is subdued. And now as China, the engine of the original supercycle, slows, where will the next big buyer of all these commodities come from?
Well, nowhere. That means the commodities supercycle presciently hailed by Jim Rogers is over, after a nice 12-year run from 1999 to 2011.
So, resource and mining stocks that flourished during those years may now be also-rans. Other underperformers will be commodity-exporting economies like Brazil and Australia. And the "commodity currencies," which also flourished during the supercycle, will likely lag as well.
The Canadian dollar, which climbed above C$1.05 to the US dollar in July 2011, now changes hands at $C0.96. The Aussie dollar is off nearly 13% from its July 2011 all-time high near $A1.10, and also trades below parity with the greenback. The Brazilian real has lost 25% of its value against the dollar over the last couple of years. And the US dollar index recently hit a four-year high of 84.50.
That suggests companies that use raw materials heavily should do well in this environment. And indeed, Ford Motor (F) and General Motors (GM), which use lots of aluminum, copper, and steel, have strongly outperformed the S&P 500 this year. Moderate gasoline prices have helped, too. (GM does a lot of business in China, however, and could be vulnerable to the rebalancing.)
Airlines also have been winners. 35% of their operating expenses come from fuel, and jet fuel prices have fallen 3% from a year ago. Delta Air Lines (DAL) has soared more than 50% this year, while Southwest Airlines (LUV) has gained nearly 40% so far in 2013.
Much of the big drop in commodity prices is already built into these share prices. Other beneficiaries like homebuilders and retailers already have had torrid runs, so investors will have to be selective.
But I would certainly cut holdings in commodities-oriented stocks and exchange traded funds, as well as in commodities currencies, to no more than 5% of your portfolio-and use them strictly as inflation hedges.
When times change, investors must change, too, and as China's torrid growth slows, the investment themes of the 2000s no longer hold up. So goodbye, Chinese hypergrowth and commodity supercycle.
But hello again to patient investing in US stocks and markets...still the best way to build long-term wealth for people like you and me.
Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. Follow him on Twitter @howardrgold. A family member owns Ford stock, and he owns an Australian dollar ETF.
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