From the Fleet Street Letter (GBR) – News overnight from China’s annual National People’s Congress gives you a chance to add another position to the Whisky Portfolio. It’s a chance to add value in a market that’s turning up. And it gives you exposure to a global force in the semiconductor industry that’s trading at just 12 times earnings but yields 3.9%.
What was the news?
The keenly awaited Chinese stimulus package has been announced. Chinese Premier Li Keqiang has announced that the new growth target will be 6.5% to 7% for the year, and at least 6.5% until 2020. Chinese officials said that growth will be sustained without devaluing the currency and this would be achieved by increasing the fiscal deficit to 3% of GDP. The result will be rising levels of debt. Xu Shaoshi, head of the National Development and Reform Commission said that ‘China will absolutely not experience a hard landing’.
I wrote last month that markets were expecting Chinese devaluation. That would be the natural outcome as the currency is, on all reasonable measures, overvalued. However China is a command economy and therefore has control over its policies and outcomes. The negative for China is that debt will continue to accumulate which will become a problem down the road.
The positive is that global markets will avoid a painful devaluation for the time being – the key factor that has caused the market malaise since last August. This boost is unlikely to turn around global trade. But Chinese policy will address the supply side and look to reduce capacity. Over time, that should help to restore profitability within the industrial sector. In the mean time, it is expected that levels of consumption will keep the economy moving forward.
Taiwan is a part of Greater China and appears to be in a strong position to benefit.