Time to Get Real About the Chinese Economy
20 August 2023
The wheels came off a bit this week, with a pretty disappointing performance, though still ahead of the market index.
Negative market sentiment was driven by concerns around the Chinese economy, with disappointing economic data continuing to come out of the country. Additionally, Chinese real estate developer Country Garden missed bond payments, further suggesting that there are issues with the Chinese real estate industry.
The real estate sector in China drives more than a quarter of economic activity, and a significant slowdown there would have huge ramifications for the global economy, in particular commodity markets. Unsurprisingly the Chinese real estate sector is a huge consumer of heavy commodities and metals in particular. As such, many of the mining names in the Porch-folio significantly underperformed. Given these names make up about 35% of the Porch-folio it was going to be a tricky week.
There are suggestions that the Chinese administration will look to support the sector and the economy shortly, likely via cutting core lending rates. This is to reduce borrowing costs in the economy with a view to spur demand.
The biggest loser in the Porch-folio wasn’t in fact one of these commodity exposed names but instead Latin American e-commerce company MercadoLibre. The stock has been very volatile, but particularly so recently with the Argentinian presidential primary elections where Javier Milei took the largest share of the vote. Milei is pushing for a more radical and right leaning agenda, in particular “dollarising” the economy. This could put more pressure on inflation in Argentina and a more difficult environment for MercadoLibre to do business in.
The biggest winner in the week was Mexican based Coca-Cola FEMSA. It is a name that I have liked previously but felt the price was a little expensive. With a recent weakness in the price, it was added to the Porch-folio a few weeks ago, and has already rallied back to those levels. I feel the stock is now fairly priced and will continue to hold it for the meantime.