Et Tu China?   

• Any notions of de-coupling among emerging, and especially BRICs nations should have been completely debunked. Yet we believe that the major international organizations (OECD, World Bank, IMF, etc.) still have too-sanguine assumptions about economic growth in China for the foreseeable future.  Data emanating out of China indicate that Chinese exports hit a brick wall called the global synchronized recession from November of last year, factories are falling like flies in China now, and the property market is showing some serious cracks. The focus of the Chinese government has turned to employment and maintaining social stability, while the World Economic Forum is warning of risks regarding domestic social unrest and added pressure on the global financial crisis from a hard landing in China’s economy.
• While history never repeats exactly, we see many parallels in the US economy and stock market in the 1920s, the Japanese economy and stock markets leading up to the 1970s oil shocks, and the Chinese economy and stock market of today.
• The US was the wild west of the global economy in the 1920s, Japan was in the 1970s and China is today. As a result, the global crisis has hit China’s stock markets and will hit its economy relatively harder. But rather than the a double dip 10-year malaise in the US in the 1930s, or a similar decade-long malaise such as seen in Japan in the 1990s, we see China’s economy reacting more like Japan’s in the 1970s.
• Further, the evaporation of China demand is hitting Japan’s globally active companies harder than their domestic-only compatriots, because they had been counting on BRICs demand to offset rapidly falling US and European demand. The combination of the bottom falling out of global demand and the soaring yen is creating a river of red ink in the profits of Japan’s best-known international “blue chips” that continues to accelerate.
• Thus we continue to look for domestic-oriented niche companies benefitting from consumer trading down, as well as companies with high recession resistivity as shown by low breakeven sales ratios.

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