China rally 'to rent not to own', says Rockefeller International's Ruchir Sharma

Here's Rashir Sharma, chairman of Rockefeller International, founder and CIO of Breakout Capital, and author of the book, What Went Wrong With Capitalism. Rashir, so you don't buy this China rally, literally? You rent it? Yeah, in terms of what I mean here is the fact that the playbook I've been using has been Japan of the 1990s, which is that the market and the economy both have made secular tops. There are some very structural reasons as to why the economy has been decelerating, but it is punctuated by frequent stimulus measures and also very big rallies. So if you look at Japan back in the 1990s, even though the market lost two thirds of its value through the decade, there were two or three very, very sharp rallies, one as much as 80 to 90% in dollar terms. So I think that that's the structural point here. I do think that this is a trading rally which has more to go. So yeah, we have rallied about 20% off the lows just now. Could we rally the 20, 30%? I think that's certainly plausible, but from a long-term perspective, I think that this is a rally to rent, as I said, not to own just because of the structural problems that China still faces. This is still an economy saddled with an incredible amount of debt and its demographics are very negative. How do you fight that? How do you fight when your working age population is set to break 80 million this decade? I do want to mention Costco results are out. We're going through them. The stock is higher by about a percent initially. We'll get more into those in just a moment, but Rasheer, so what are the broader implications here? If you're saying this is kind of a sugar high with Chinese stocks in the economy, not something sustainable, there are a lot of other markets, other economies that are closely tied to China. Are those, in some cases, emerging markets in trouble? Well, I think that those are the economies which could eventually benefit. I penned a op-ed on this last month called The Rise of the REX 2.0, and the point I made there was that the pessimism regarding emerging markets, including China, by the way, was extremely negative, and that we were likely to see these economies do better outside of China, in particular, in the coming years. In fact, as I argued in the piece that about 88% of the economies in emerging markets outside of China were likely to experience a faster per capita income growth than even the United States over the next five years. What this stimulus does, I think, in a very meaningful way, is at least it puts the floor under China for now. There was a risk before this that the Chinese economy was going down really a vicious spiral because of the deflation that it set in, the property market being bust, the banks being undercapitalized. There was a lot of trouble that was happening in China. What this does for now is put a floor under China, and that allows other emerging markets to stop facing the deflationary pressure coming from China, and their fundamentals, I feel, are stronger when you look at the data demographic profile. So I wonder what this means for index fund and some mutual fund investors out there who might be in Asia funds in general, international funds in general, considering that you expect China, which has been such a big deal, to sort of stall out. Does this mean you need to shift strategies now and start thinking about things in a more market-specific way? Absolutely, and that's already been happening. So if you look at this decade, there's been a massive difference in performance between China and, let's say, India, or other emerging markets in the region, in Indonesia, or even in Eastern Europe, the likes of Poland. There's been a huge dispersion in returns. Now, what this does is, for a while, it closes that gap out, but I think that the long-term trend is still for that dispersion to continue. So I do feel that the Chinese market has some interesting buys, even for a long-term investor. Even Japan in the 1990s, there were some export companies in Japan which did very well in the 1990s. Much harder for China to do that, given the threat of terrorists, but it's been going down that path as well. So yes, I feel that this is a time for a very differentiated kind of strategy, but I feel that, as far as the China rally is concerned, yes, it could go up another 20, 30% from here. I think that's because the pessimism had become so entrenched where people were saying this country is uninvestable. This takes that risk out of the way for now, but if you're looking for a three to five-year time horizon, then I do feel that some of the emerging markets offer much better growth and value opportunity than China.