Sometimes as an investor it is a good idea to look at the big picture and the long term view. It is easy getting involved in day to day or week by week movements and topical controversies. Much of this is just noise in the system, a temporary high or a short term disappointment.
The good news is the longer term picture has been a healthy one for economies and for share investors. There may well be more of the same to come in the years ahead. Over the last seventy years we have seen the world as a whole grow strongly. We have seen Japan emerge as one of the richest countries. Various emerging market economies have flourished. Korea, Singapore, Hong Kong and others have completed a transition to richer societies. The last twenty years have seen phenomenal growth in China, and seen good progress in India. There has been a welcome narrowing of the gap between the richer countries and many of the emerging market states. This has happened for the best of reasons. The lower income countries have got richer faster than the advanced countries.
The imbalances in the world between the richer areas and the rest are still, however, large. In the USA 4% of the world’s population generate 16% of the world’s output and income. In the Eurozone another 5% of the world’s people also produce substantial output. Excluding the advanced countries, China and India, the rest of the world with 49% of the world’s population produces 34% of world output. China now has benefitted from high rates of growth for many years, and is catching up with income levels in the advanced world. China has 19% of the world’s people and 18% of the world’s output, whilst India with 18% of the population provides 7% of the output. It still means that China’s output has to multiply almost by four before she reaches US levels of income per head. Given the large population China already has an economy larger than the US on measures adjusted for purchasing power.
The big divergence is more visible when it comes to the value of quoted companies in the main stock markets of the world. All the shares quoted in the US account for half the total value of all quoted shares worldwide. China accounts for just 4% of world stock market values. It seems likely in the years ahead that this gap will narrow. As China develops faster than the US so the earnings and dividends of Chinese companies should rise more quickly, boosting valuations. Chinese growth is also likely to include substantial privatisations as nationalised industries are turned over to market disciplines, and as activities formerly controlled by state monopolists are opened up to new competition and new sources of capital. Fast growth is also likely to produce new generations of growing companies. Some of these will wish to gain stock exchange listings, as entrepreneurs seek more investment to speed development, or seek to take some profits on their shareholdings.
It does not mean US shares have to fall to make this change. Indeed, one of the reasons US shares remain such a large proportion of the world market is the US success at developing the new fast growth businesses of the world economy, and doing this through quoted companies. If China does well from here, that will benefit the US as well.
It is true that this long term picture of good growth in economies producing good growth in share prices and dividends has been subject to some deep and damaging setbacks. The Japanese crash of the early 1990s after a big debt build up and large asset price inflation was probably the worst, but the western banking crash of 2008-9 also brought markets low, as did the Oil crisis of 1973-4. Many investors try to manage around these periodic bouts of policy and banking disaster, as the losses on shares can be large when they hit and it can take some years to rebuild the capital committed to the market. If an investor manages to take evasive action when there is a bad bear market, their long term returns are greatly improved. In the unique case of Japan the share index is still not back to the peak levels of four decades ago. Meanwhile the US, European and UK markets make new highs, meaning even those who bought at past peaks are now getting some reward for their patience.
The above article was first published by Charles Stanley on 9th January 2018