Finding Growth in a Low Growth World

There’s no two ways about it. We are in a sideways market. Growth is low, with subpar earnings in an inflated market. This dogma is pumped out by the mainstream media on a daily basis.

The problem is it’s not representative of our market in 2016. Yes, we’ve had tough times. We certainly got off to a rocky start.

But thanks to a year-end rally, the ASX200 is up 5.57% year-to-date (YTD). Most other global indices like the S&P 500, Dow, DAX and FTSE 100 are also ending the year up.

But according to the Australian Financial Review, this is all thanks to interest rates. Here’s an excerpt from the article:

Take a look at the performance of global share markets over the past eight years since the worst of the global financial crisis. 

Rather than growth, it has been all cheap money, and nothing much else, given the earnings reported during that time, that has been really driving shares higher.

It sure explains why all eyes are on interest rates and the Federal Reserve. Yet it’s a weak explanation for why some market sectors have boomed. I’m talking about the resource sector.

The S&P/ASX 200 Resource index is up 34.95% this year. Big miners like BHP Billiton Ltd [ASX:BHP] and Rio Tinto Ltd [ASX:RIO] both climbed 39.47% and 32.54% respectively. That’s not bad, to say the least.

But take a look at smaller miner, South32 Ltd [ASX:S32]. It’s up more than 146% YTD. You just don’t see returns like that in the short-term from the billion dollar companies.

I’m sure you’d agree with me that the resource recovery had little to do with interest rate. The recovery was due to strengthening commodity prices.

The mantra of a coming recession, slow growth and dark days ahead is a worldwide opinion. It’s hard to find an economist who believes growth will come back to the market.

But the answer to growth in 2017 could be what causes resource stocks to climb in 2016. The answer is China.

Soon to be number one

I’m not going to sugar-coat it, China has its problems. Many sceptics see China’s growth plans as hype. And in all fairness, China’s transition from an industrialist nation to a consumerist economy hasn’t been all that smooth. In April this year, China posted the slowest economic growth since 2009.

If you can call 6.7% GDP growth slow.

The country tried to ignite growth through surges of new debt. The plan was to recover factory activity, investment and household spending. It was a solution, but only in the short term. When times get tough, policymakers seem to revert back to the old playbook. They fuel growth through spending.

But more often than not, investors tend to focus on the negative and forget the opportunities.

China’s economy is dominant. They are second only to the US. And The Conference Board believes China could take the number one spot by 2018.

China’s movements influence investors the world over. An overnight drop in Chinese markets was expected to ‘take the wind out of local investors as it has in Europe and to an extent the US,’ according to the Australian Financial Review.

China’s new five-year economic plan stated science and technology would be at the forefront of economic growth. They’re looking to opening up their country to more international co-operation. And they want to mass produce creativity, for innovation’s sake.

But, right now, it’s their ever growing consumer base that is creating growth. Not just for domestic businesses, but foreign businesses as well.

A recipe to ignite growth

There have been many Aussie small-cap stocks on the other end of Chinese consumer demand. And they’ve had no trouble running share prices up 100% or more.

You’ve probably heard of Bellamy’s Australia Ltd [ASX:BAL] and Blackmore Ltd [ASX:BKL]. Both rose to stardom on the back of Chinese consumers. In 2015, Bellamy’s rose 715% and Blackmores climbed 534%.

I’m not going to tell you to invest in these companies. They’re both old news. As you might already know, Bellamy’s and Blackmores have tumbled in 2016. Both are down 50% year-to-date.

Yet this hasn’t discouraged investors, both Aussie and international, from trying to find the next Bellamy’s or Blackmores.

BMY Group is trying to raise $50 million to invest in Australian start-ups with hopes of Chinese expansion.

The Melbourne-based firm is still fairly new. But despite only just launching, they expect to have $15 million by January.

Co-founder of BMY Group, Eric Gao, believes there is an untapped desire from Chinese investors. Not just for Australian goods and real estate, but also to invest in local start-ups.

There are so many fund managers who are talking to Asian investors and promoting property and hotels. They’re familiar with that, but it’s not the one investment they want to make. Australia offers a lot more than that,’ Gao said.

Venturing into small-cap stocks isn’t without its risks. Some might not even be making a profit. But just like the beaten down resource sector, many small-cap stocks have huge potential. Especially when they try to capitalise on China’s growing consumer base.

That’s why I believe small-caps are the best place to look for growth in 2017. It’s not unheard of for Aussie small-caps to rocket up 100%, 500% or even 1,000%.

I know because I’ve seen a number of them skyrocket while working with Sam Volkering on his advisory service, Australian Small-Cap Investigator.

Many of Sam’s active investments stand to profit from Chinese consumer demand.

His 2016 investments have average returns of 24.8% YTD. But it if you include all of Sam’s active investments, his average returns jumps to 64.26%.

Sam takes on risk to get these kinds of returns. But by managing his losses and letting his winners run, Sam has produced some amazing returns for his subscribers.

If you want to find out how Sam does it, click here.


Härje Ronngard,
Contributing Editor, Money Morning


From the Port Phillip Publishing Library

Special Report: The Lazarus Project, your best chance to double every dollar you invest this year. Click here for more…

Money Morning: How to Trade the Gold Bear Market

Money Morning: Should You Buy or Sell Stocks?

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia