China’s Household Savings Rate and Household Expenditure as a share of GDP

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The economy of China has been in the doldrum for the past few years since the pandemic. A recent article in the journal discussed the reasons China is unable to revive its stagnant economy and drive expansion. Unlike the US economy, the Chinese economy is manufacturing and export-based. Since the consumption is further down the economy is stuck in low growth mode. While western experts suggest the country increase its consumption of goods and services and become a consumption-based economy it is unlikely to happen.

For starters, the Chinese are big savers and not spenders. The lack of major social safety nets like social security and others force people to save more for the future. This scenario will not change anytime soon. The following chart shows the household savings rate as a percentage of disposable income:

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Source: Communist Party Priorities Complicate Plans to Revive China’s Economy

For comparison, the household savings rate in the US was 3.50% in July this year. No wonder consumption is a major part of the US economy.

The chart below shows the Chinese household expenditure as a percent of the GDP relative to a select few countries:

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Source: Communist Party Priorities Complicate Plans to Revive China’s Economy

The difference is indeed massive between the Chinese and US rates. The idea that China’s over 1.4 billion population can consume like there is no tomorrow on consumer goods and services is far from reality anytime soon.

On The Outperformance of US and International Stocks From 1971 to 2022

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US stocks have performed very well in the past few years over their international peers. However that is not always the case. There have years when foreign stocks outperformed US stocks. The key point to remember is that the outperformance of US stocks over international stocks and vice versa rotate over the years. The following chart shows the relative outperformance from 1971 to 2022:

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1.Source: Bloomberg, MSCI, 12/31/2022. International and US are represented by the MSCI EAFE and MSCI USA indexes, respectively. Peak to trough total cumulative performance calculated for periods of relative outperformance lasting 12 months or longer.

Source: Uncovering International Investment Opportunities, Franklin Templeton

One way to take advantage of this phenomenon is to diversify between these asset classes. Accordingly it is important to own both US and foreign stocks. Simply putting all the assets in just domestic equities is not a wise move. It remains to be seen if foreign stocks can outperform US stocks since 2022.

Relative ETFs:

  • SPDR S&P 500 ETF (SPY)
  • Vanguard Developed Markets Index Fund ETF(VEA)
  • Vanguard MSCI Emerging Markets ETF (VWO)

Disclosure: No positions

Norfolk Southern is the Worst Performing Railroad Year-to-Date

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Canadian Pacific(CP) is the top performer in terms of returns so far this year. Of the three American railroads only Union Pacific(UNP) is the positive territory.

Norfolk Southern Corp(NSC)’s stock has been punished by the market due to uncertainties surrounding the train derailment that occurred in February, 2023 in East Palestine, Ohio. Though lawsuits have been filed many analysts agree that legal and other expenses are not expected to adversely impact the company’s earnings. This is because all railroads have insurance to cover such scenarios and in this case Norfolk took several mitigation measures to help the residents impacted. So from an investment point of view analysts have said that the stock is a good long-term buy at current levels. From a high of around $300, the stock has declined to as low as under $200 and closed on Friday at $206.

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Note: Returns shown above are price returns excluding dividends

Source: Google Finance

Investors willing to wait out 5 years or more can consider adding Norfolk in a phased approach at current and lower levels.

Related Stocks:

  1. Canadian National Railway Co (CNI)
  2. Canadian Pacific Railway Ltd(CP)
  3. CSX Corp (CSX)
  4. Union Pacific(UNP)
  5. Norfolk Southern Corp(NSC)

Disclosure: Long CNI, CSX, NSC and UNP

Major Declines and Recoveries in US Equity Markets: Chart

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Market declines are common in equity markets. Stocks do not always go up forever. Bull markets are followed inevitably by bear markets and vice versa. They key point for investors to remember is that when stocks decline it is important to stay the course and not bail out. Unless absolutely necessary it is never a good idea to liquidate stocks during bear markets and move to cash. In fact, selling at huge losses only leads to missing out on huge upward moves which is often sharp and dramatic.

The following chart shows the major bear markets in the US markets and the strong recoveries that followed:

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Source: Market Declines: A History of Recoveries, MFS

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • iShares Core S&P 500 ETF (IVV)
  • Vanguard S&P 500 ETF (VOO)
  • SPDR Portfolio S&P 500 ETF (SPLG)

Disclosure: No positions

Why Australian Investors Need To Invest In International Markets

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One of the strategies for Australian investors to earn higher returns is to invest in overseas markets. Simply going with Australian domestic equities is not the best idea since markets aboard can yield better returns. In addition, it also offers diversification benefits. The Australian economy is mainly composed of old economy sectors. The major sectors are Mining, Finance, Health & Education, Manufacturing and Construction according to RBA. The tech sector for instance is not a top sector. Accordingly, the IT sector is just 2.4% of the ASX 200 index as shown in the chart below:

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Source: S&P

One of the international markets Aussie investors can consider is the US market. The S&P 500 has trounced the ASX 200 index by a wide margin especially in recent years. The following chart shows the performance of the ASX 200 vs. S&P 500 from June, 2013 to June, 20222:

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Source: Reuters, CommSec
*10 year comparison based on monthly data ending 30 June 2023. The chart shows the relative performance of the ASX 200 Index (red) compared to the S&P 500 Index (green) In order to compare like for like, both indices have been rebased to a starting value of 1.

Source: CommSec

The huge difference in returns cannot be understated even with taking into account factors like foreign exchange rates, fees, etc.

Related ETFs:

  • SPDE S&P 500 ETF (SPY)
  • iShares Core S&P 500 ETF (IVV)
  • Vanguard S&P 500 ETF (VOO)
  • SPDR Portfolio S&P 500 ETF (SPLG)
  • iShares MSCI Australia Index Fund (EWA)

Disclosure: No positions