"China has helped lead the recovery in global stockmarkets...."

A CHINESE FRENCH LESSON

We have seen an impressive rally in the stockmarket over the last couple of weeks that seems to have taken a number of people by surprise. It has been fuelled by companies consistently outperforming analysts expectations, and also while the Western World appears to still be in recession. How come?

Speaking to economists, when it became apparent that a recession was inevitable they were almost all of the opinion that a downturn in Western consumption would have a huge impact on China as the main supplier of goods to the West. The knock on effect would be that China would not be able to grow at the rate it had been and demand for commodities would fall off a cliff. As this became accepted wisdom we saw massive falls in commodity prices, and it was one of the reasons the oil price fell as quickly and dramatically as it did.

Now, we have often commented on the need to think outside the consensus as it is more often than not wrong, and this is another classic example. Much to most people's surprise, China has actually helped lead the recovery in global stockmarkets, not as a producer of cheap goods but as a consumer. I say most people, as there is one shining exception and that is M&G's star fund manager, Graham French.

We have known Graham for a number of years, and he has always managed his fund, the Global Basics Fund, in the belief that the world was going to see a massive change in its make-up with the rapid rise of middle classes in both China and India. Therefore he believes that companies that can provide goods and services in these markets are likely to be the long term winners. The numbers involved, by the way, are staggering. China has a population of 1.3billion and India 1.1billion. By way of comparison, the US has 300 million citizens.

Now, at this stage I have to put my hands up and admit my ignorance.

When quoted these statistics years ago, my initial reaction was, "So what they don't have two brass farthings to rub together?" My vision of China was of people on bikes wearing Chairman Mao jackets. All that was missing was the Coolie hat. How wrong was I?

Now there are more people using the internet in China than the total population of the USA, and it is increasing at a rate of 8 million a month. Also more than 95% of townships have access to broadband, and it is expected this will be 100% in the coming year. It puts Gordon's goal of networking Britain by 2012 in perspective.

The other fact I was completely unaware of was their desire to have Western goods and lifestyles. This has led to a change in diet with a resultant increase in demand for healthy Western food like McDonalds and KFC. In 2000 sales in China did not even rate a mention in the Yum, owner of KFC and Pizza Hut, annual report. Now they have over 2,500 KFC and Pizza Hut stores there, and soon this will be more than in the USA. They eventually anticipate having 20,000 outlets in China alone.

Only last week Starbucks profits beat expectations fuelled in part by the continued demand for their coffee in China. They anticipate that China will soon become the largest market for their product outside the US, and one day demand there may rival the States.

As well as fast food, the Chinese have also developed a taste for luxury items, and are now one of the most important markets for French wine exports, having grown from nothing in the last ten years. In fact this year demand is expected to be 50% higher than last year, the only global market where French vineyards expect to see any growth.

None of this however comes as any surprise to Graham. By sticking to his convictions and beliefs, he has been able to deliver outstanding returns, and even taking into account the falls we saw last year, he has grown the fund by 91% in the last five years. The fact that others appear to be waking up to the changes he foresaw years ago does not make him gloat, as he believes the consensus will still underestimate the long term impact both China and India will have on the world.

I, however, believe I have seen a gap in the market and I'm off to Beijing with my Irn Bru and deep fried Mars bars!

Steve Forbes

Steve
Author
Steve Forbes
Managing Director
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

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This letter is the personal view of Steve Forbes. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.