September trade data released today by China’s National Bureau of Statistics showed a larger-than- forecast surplus as dollar-valued imports shrank by 20 percent year-over-year and shipments abroad proved more resilient than expected, contracting by just 3.7 percent from September 2014. This marks the 11th consecutive decline for Chinese imports. With this latest sign of softening demand from the world’s third-largest economy, risk assets lost steam, with equities in Europe and Asia trading lower alongside oil and compression of yields for U.S. Treasuries.
Brewing mega-merger agreement reached. Anheuser-Busch InBev and SABMiller have finalized a $106 billion merger agreement that will bring the brands accounting for one third of global beer consumption under a single corporate roof. The deal includes a $3 billion breakup fee for SABMiller shareholders if the transaction cannot be executed for regulatory or economic reasons.
Inflation lower than expected in U.K. Consumer price index levels released today by the U.K. Office for National Statistics indicated weaker-than-forecast inflation for Britain in September with headline prices down by 0.1 percent versus the same month last year. Prices excluding fuel-and-food inputs registered at 1 percent year-over-year, lower than consensus estimates and providing the Bank of England with additional time to wait before raising rates.
Sentiment slumps in Germany. Perhaps affected by the ongoing scandal at Volkswagen, the German ZEW sentiment index measures for October disappointed forecasters, with the headline benchmark slipping to the lowest reading in a year at 1.9 versus 12 in September. The current situation index slid to 55.2 from 64.7 in the prior month.
Barclays brings in outsider to lead bank. The Financial Times today reported that James Staley has been selected to head London-based Barclays, replacing chairman and interim CEO John McFarlane, who has been acting head since July. Staley had been a senior executive at New York’s JPMorgan Chase for decades and currently sits on the board of UBS.
Novogratz out at Fortress. Media reports today indicate that New York’s Fortress Investment Group will shutter the macro hedge fund overseen by Michael Novogratz after a period of underperformance and after assets under management have declined to less than $2 billion after peaking above $8 billion. Novogratz, a former Goldman Sachs partner, is expected to leave the firm.
Portfolio Perspective: China Transitions from World’s Factory to World’s Market
The Chinese officials seem to be willing to take short-term pain for long-term gain, in the economy’s transition from a model based on investment to one based on consumption and services. Between now and 2020 there will be an increase of 100 million urban residents in China and 250 million more members of the middle class, who will be earning twice the per-capital income that they do today. The latest annual global wealth report by Allianz reported that China’s strong growth over the last decade has already left the country accounting for more than half of the global middle class. Another factor that will fuel consumption is the age demographic of the Chinese population. Household consumption tends to peak when the head of households reach 45-49 years old. In China, the percentage of households with 45-49-year-old heads will peak in 2015–2025, further supporting predictions of a consumption boom ahead.
Additionally, the service sector is highly under-penetrated in China, contributing only 53 percent to GDP vs. the global average of 61 percent and 66 percent for high-income countries. This service undersupply will be forced to change especially as booming consumer demand will be unmet — health care, banking services, logistics, education, food safety, entertainment are just some of the sectors that are set to benefit. With the great Internet infrastructure, Chinese consumers are fast becoming the world’s most discriminating and knowledgeable. Thanks to the convergence of mobile commerce and social media, China is the epicenter of “social commerce.” Thus, we think the change will be quite fast and provide a cushion to a natural slowdown.
Ignacio Pakciarz is the CEO and managing partner of BigSur Partners in Miami.
