China’s “miracle economy” and its impact on world poverty

rural Chinese street market

Perhaps many of my associates have been waiting patiently for frontier markets equity funds to produce some positive returns. Frontier markets number some 63 nations that are so latently emergent that they are not classified as “emerging”, the more common satellite asset class in advisor portfolios. So what is the prospect that we will see some progress by them? Part of the issue is the continuing divide; even antagonism between the economically developed world and the global frontier economies. Critics decry “neoliberal” policies demanded by the US and European dominated World Bank and the International Monetary Fund that steer emergent economies away from socialism. The US and European dominated World Bank and International Monetary Fund, for instance may demand the privatization of state-owned infrastructure such as railroads in exchange for credit. These policies, critics argue do more to open developing economies to predatory multinational corporations than strengthening these economies. This fosters dependence on the developed world economies and do little to foster development; the key element in frontier markets returns.

Mark Weisbrot, Co-Director of the Center for Economic and Policy Research takes issue with President Obama’s assertion at the UN yesterday that “globalization” is responsible for a substantial reduction in world poverty. Inadvertently, Weisbrot argues, the President gave high marks to the Chinese economic miracle and its patient transition from a planned (sometimes called “command”) economy to an economy of mixed socialism and capitalism. Weisbrot observes that most of the 1.1B people who have moved out of extreme poverty in the last 25 years live in China. Weisbrot argues that the Chinese economy is hardly the poster-child of “open markets”; the “way forward, not backward” in Obama’s words. China has also had a great impact on other frontier economies through liberal trade with these markets; increasing their share of frontier markets exports  from less than .1% in 1980 to more than 3% in 2010. China, Weisbrot observes has also “provided hundreds of billions of dollars in investment, loans, and aid to low- and middle-income countries in the 21st century”. Weisbrot does not support the Trans Pacific Partnership; the 11 country trade deal that has become a signature policy of Obama’s.

Brexit and investment strategy

Brexit Cameron and MerkelAs I write this the Dow 30 is down almost 500 points due to the shock to world financial markets of the vote by the British to leave the European Union. Here is the transcript of Dean Baker’s analysis given on PBS’s News Hour.  Baker believes that this is, in part due to strong anti-immigrant sentiment. Among the (perhaps) unintended consequences is the ease with which young Brits were able to seek and take jobs anywhere within the EU. It will also adversely affect the 2.5M British expats living on the continent.

What I expect to see is what I predicted to my client this morning where we see each other poolside mornings. I told him the Dow could plunge as low as 500 points today. If you are an investor with a well diversified portfolio of stocks, bonds (both domestic and international) and other asset classes is that your holdings’ values will dip as their underlying prices dip but you will not lose the number of shares you own. If you sell during this downturn perhaps speculating that the slide will continue, you will lose your shares, as well as their value.

Smart investors (and their smart advisors) will not sell holdings during this downturn but will examine their asset allocation to see which of them have been affected. This will be evident in the change in their proportion to the entire portfolio. If you, as other smart investors do, hold cash as a distinct asset class, you will have the liquidity to buy more shares to bring those holdings back to their target allocation. In this process you will be buying shares that have a (hopefully temporary) market discount. Please consult your advisor for confirmation of this general outlook. If you have any questions, please don’t hesitate to call. (520) 623-3646. Thank you!