This weekend marks 20 years since the commercial world changed for ever, but many investors’ fund and share portfolios fail to reflect that economic fact. China joined the World Trade Organisation (WTO) on December 11, 2001, opening a massive new consumer market populated by nearly a fifth of humanity, boosting the global supply of goods and creating a superpower to actively rival the US.
Coming down from the clouds, this small investor had been happy to surf that wave since the handover of Hong Kong in 1997 with shares in what was once Fleming Chinese Investment Trust and later became JP Morgan China Growth & Income (stock market ticker: JCGI). At various points over the years I also invested in Fidelity China Special Situations (FCSS) and a unit trust, Gartmore China Opportunities.
These were among the first funds to bounce back from the global financial crisis in 2008, when I took profits to buy myself an old wooden sailing boat that year. She remains a joy. Who says finance has to be boring?
More widely — and less politically — I also gained exposure to the economic dynamism of Asian emerging markets by investing in what was Fleming Indian Investment Trust before it was renamed JP Morgan Indian (JII). It went on to become my first ten-bagger (making ten times its purchase price) after I bought shares at 63p in June 1996 that traded at 827p on Friday.
Focusing on medium-sized and smaller companies on the subcontinent has helped India Capital Growth (IGC) to deliver even bigger total returns than JII. So I bought shares at 120p in September that subsequently ticked up to 126p on Friday.
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Elsewhere, I invested in Vietnam Enterprise Investments (VEIL) at 404p in July 2018, as reported here at that time. I added to this position twice the next year and again last January. Now that the shares trade at 767p, VEIL is knocking on the door of my top ten holdings by value.
Less happily, I became alarmed by increasingly shocking reports of human rights abuses in China. It is foolish to expect every country to follow our way of life and, from what I had seen on business trips to factories in Shanghai and Shenzhen, I knew that working conditions were tough by western standards, but did not appreciate quite how hard. After the Democrat leader, now US president, Joe Biden described maltreatment of more than one million Uighurs as genocide, I sold all my China shares in April 2020.
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As discussed here at that time, my motivation was ethical as well as financial. One of the main privileges of managing my own life savings is that I can invest in things I support and shun stuff that I dislike.
To be candid, I was surprised at how much some readers resented this approach, with one arguing that because white Americans had oppressed indigenous people who died more than a century ago, it was impossible to oppose evil being done elsewhere to people alive today. With moral relativism like that, there’s not much hope for a better future.
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Most immediately, pressure is mounting on China after Australia and Canada alleged human rights abuses last week and said they would follow the US in a diplomatic boycott of the Beijing Winter Olympics in February. Boris Johnson, the prime minister, said we would “effectively” do the same. Economic stress can also be seen in the death by a thousand cuts of Guangdong-based Evergrande, China’s largest property developer before it built the country’s biggest pile of debt — estimated at $300 billion — and began missing interest payments. Evergrande’s share price has collapsed nearly 90 per cent this year.
Feverish attempts to shore up this subsiding structure did not impress the credit rating agency Standard & Poor’s, which said this week that default “looks inevitable for Evergrande”. Fears that bad debts will drag down other firms spread when China’s second biggest property developer, Kaisa Group, missed the deadline to repay $400 million and suspended trading in its shares.
All things considered, I am glad I reduced exposure to China and increased investment in India and Vietnam. In the short-term this was a mistake — FCSS shares I sold at 227p are now trading at 325p — although there are early signs that it may yet prove right in monetary terms as well as moral ones.
The FCSS share price is down 13 per cent over the past year and JCGI has fallen 16 per cent. In the same period JII has risen 24 per cent, IGC 51 per cent and VEIL 45 per cent, according to the independent statistician Morningstar. There might be more to come if international companies that rely on China for manufacturing relocate more work to India and Vietnam. For example, the technology giants Apple (AAPL) — the most valuable holding in my forever fund — and Samsung (SMSN) are said to be considering strategic options.
China is no longer as cheap as it used to be and its cold war with the US is heating up. Politics can trump economics when governments intervene, so investors should consider both. This is especially important in countries with weak legal systems where property rights are difficult to enforce. China has enjoyed explosive economic growth in recent decades and stock market valuations reflect that fact. Even so, earlier stage emerging markets might prove more profitable for investors allocating assets today.
Inflation is brewing — here’s my plan
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Coffee bean prices hit a ten-year high last week after nearly doubling since the start of the year. Bad weather in Brazil and bottlenecks in international logistics are squeezing supply while demand is rising, with inevitable effects on prices.
When I last looked at so-called soft commodities such as coffee, corn and soya in August, top-quality Arabica beans futures fetched $2 a pound. They had brewed up to $2.50 last week in what looks like a sign of widespread food and drink price inflation to come.
This will be bad for most consumers and businesses but could help companies that trade in these commodities — as well as big brands with pricing power. That’s why I bought more shares in Archer Daniels Midland (ADM) one of the largest agricultural commodities traders in the world, paying $59 in August for shares I had first bought for $42 in May 2016. They traded at $63 on Friday and yield 2.3 per cent. Income is important to ADM, which has distributed dividends continually since 1932 and raised payouts every year since 1981.
Nestlé (NESN), the biggest food and drink producer in the world, and the fourth most valuable holding in my forever fund, is another hedge against inflation. Shares I first bought for SwFr65 in March 2014 had frothed up to SwFr125 on Friday and yield 2.2 per cent. Not many people know this, but Nestlé makes many Starbucks products.
Inflation is the insidious enemy of savers because it slowly erodes the real value of money. But investing in soft commodities can counter that trend. It’s time to wake up and smell the coffee.
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Read a full list of Ian Cowie’s “forever fund” at thesundaytimes.co.uk/cowieholdings
