The Valor Blog.
Investment News and Views, Direct from Our Team.

How to profit from the China slowdown

How to profit from the China slowdown

  1. Have the great majority of your assets outside Australia
  2. Remove as much debt as possible
  3. Sell any excess property, Sell all banks, Sell all miners, Sell asset based companies
  4. Keep Australian companies that have large global sales.
  5. Buy capital independent wonderful companies
  6. Have spare cash
  7. Avoid companies dependent on a China miracle

The last four years have offered wonderful tailwinds of a falling Aussie dollar. $1.10 to 70c is a lovely correction for those, such as Valor, who were positioned correctly. Fortunately the story is not over. We believe that there is still material upside in a falling dollar for portfolios. We expect to begin removing currency exposure in the mid 60c range.

Australians have possibly the largest debt loads of any nation on the face of the planet. I think our obsession with debt is insane. For those that have read about financial history, the complete wipeouts that are caused by excessive debt are horribly destructive and in many cases permanent. Do what ever you can right now to sell assets to reduce debt. For some this includes the very difficult discussion of selling your family home if you have borrowed too much.

Sell excess property, sell the banks (including hybrids), sell your miners and sell asset based companies (e.g. fund managers). Unfortunately this is the vast majority of Australians investment holdings and the wealth effect in reverse may be dramatic. Around 70% of the Aussie share market is exposed to these areas. These investments have been wonderful for decades. It may be decades before you see a return from these investments again.

Keep Australian companies that have large global sales. The falling Aussie dollar can create much higher margin expansion for the few Aussie companies that have a competitive advantage overseas. Some companies that have looked like terrible businesses over the last decade such as the wine exporters may prove to be far more profitable in the coming years than many expect.

Buy capital independent wonderful companies. This method of creating wealth works in up markets, down markets, sideways markets and if markets could do a loop the loop, then it would work in that scenario too. Capital independent companies are ones that have net spare cash or non-cyclical businesses with enormous cash flows that will not be forced to raise capital under duress. Only around 1% of the worlds businesses meet this criteria. Focusing on this extremely strict investment criteria gives Valor a competitive edge over others because during market corrections, capital independent companies buy back more shares adding value to existing shareholders. We actually hope markets go down because we make more money for our clients. This is a view shared by very few because most fail to protect their clients capital correctly.

Having spare cash allows you to pick up bargain companies that get sold down regardless of their true value. I expect the coming years to offer lots of life changing investment opportunities for the very few that are cashed up. Valor clients have significantly more cash that most.

Avoid companies that are dependent on China taking over the world in the next 15 years. China’s debt growth is unsustainable. They will not grow at anywhere near the 7% rate for the next decade or so and this needs to be factored into your calculations.