Is it time to get exposure to China?

Lex Hall: What are the implications of China decoupling from the US and decoupling from Australia for that matter? That's a theme that's been occupying Morningstar's head of equity research, Peter Warnes. And he joins me today to talk about that.

Good day, Peter.

Peter Warnes: Thanks, Lex.

Hall: Now, in the latest overview, you say China is starting to decouple from the rest of the world and driving toward greater self-sufficiency. What would the effect of this be for the US for a start?

Warnes: Well, for US, it could be quite dangerous. I still believe that the US needs China more than China needs the US. If you look at the US investment in China, it is substantial. For them to pull up stumps and go to Wisconsin, I don't think it's even in – it's not in their mind. It's in the mind of the White House. And so, the US needs to get access to 1.4 billion people. They might not have the firepower individually that the US has, but collectively, they are the biggest spenders out there.

And I think that decoupling from there, I don't know what the cost would be. As I said, labour is a very, very important ingredient of the economic pie, if you like. Capital and labour, you put those together, add technology, add brain power and what have you and out comes the other end whether it's a good or a service. The efficient way of doing that is getting low-cost capital and low-cost labour and you know what happens to your margin. And capital being mobile and much more mobile than labour, capital gravitates to the cheap labour source. That's what globalisation is all about. It's matching the two and getting them together, and they complement each other.

Pulling that apart would be incredibly difficult. And then, if you look at China's average hourly wage rate of US$4 at the top versus the US US$25, how does it work? What's the product going to cost you if you move, as I said, from Guangzhou to Iowa? Or if you want inflation, that's one way of getting it. But I don't think economically it would work. I don't think there'd be an avalanche of companies wanting to go down the Trump path, because I just don't see how it works. Look at the US corporates, again, as I say, the auto industry is a perfect example. I think there's more cars or autos manufactured south of the border than there is north of the border. Why? They speak Spanish or Mexican or whatever, probably don't like the food, but the fact is the labour is cheap.

Hall: Okay. They're obviously turning towards Australia and China. There have been rumblings about barley and other commodities. But you say the most important one is iron ore obviously. If China to suddenly back off and show less interest in our iron ore, that would be the serious factor, wouldn't it?

Warnes: Well, iron ore exports to China exceed, I'd say, $100 billion a year. I mean, iron ore makes up – nearly 55 per cent to 60 per cent of all our exports is iron ore. We are privileged because we have the highest grade of iron ore in the world. We are located in terms of freight very advantageously compared to the competitors. And Brazil is – Vale is the number one competitor. But don't forget there's a lot of development coming down the stream in Africa. But Africa is a long way from China, like South America is.

Hall: Does that mean that a company like Fortescue Metals Group should be in everybody's portfolio?

Warnes: Well, that's a big call. It all depends on price and because, as I said, I don't believe that the iron ore price is going to collapse from 120 to 42. I mean, I know Morningstar says that. But what I say – that's my thoughtful disagreement streak in me. I don't have to agree with what they say, and they don't have to agree with what I say. But you put it all together and say, well, where's the line of best fit or what have you. But I think that whilst China has been throwing a lot of money, a lot of money and stimulus and infrastructure, which is heavily biased towards steel, which happens to be iron ore, this data, this whole infrastructure thing started probably about 20 years ago, gained momentum 10 years ago, like, coming out of the GFC. But that stuff was built 20 years ago, it will be scrapped. They will either rebuild it, or they will use a scrap and of course, that also will take some of the impetus out of the iron ore because scrap will be used rather than the ore. But the ore will still be meaningful.

But everywhere else in the world – and of course, China just happened to be the biggest out there – everyone else in the world what are governments and the stimulus package is all about? They're all about shovel-ready infrastructures, et cetera. I mean, if there's one word or two words that's been used more than unprecedented, it's been shovel-ready. All those things need steel. So, I think, yes, Vale will get their act together, and China will favour them. China will go down that route, believe you me. They don't particularly – I'm not saying like Australia. Albeit, if every country in the world put a for sale sign in them, China would try to buy Australia. It wouldn't buy any other country in my opinion than Australia. They like Australia. They don't necessarily like Australians at the moment. All right? It's been a bit of argy-bargy.

So, if we've lost half our iron ore exports to China, the impact, the economic impact, would be meaningful, because net exports have been a very, very substantial prop of GDP growth over the last few years. But it can be lumpy, but that has been because of iron ore. Until we get a few other things in place, in other words, we've got, a robust household consumption and we've got some business investment and what have you supporting GDP growth, we can't afford for this other thing to fall off a cliff.

Hall: Still on China, you made the somewhat sort of "revelation" during the Morningstar Individual Investor Conference that you raised the idea of getting into Chinese ETFs. We hear constantly about the rising Chinese middle class, as well as all this steel making production. And then, there's obviously the technology component. You heard Hamish Douglas today talking about Ant Financial Group, talking about Alibaba, Tencent. A Chinese ETF, is that a safe haven dare I say it and a good way to sort of ride the dragon?

Warnes: Well, Lex, it's all about – I think you've got to have a diversified portfolio and diversification is very, very important and even more so when there's more uncertainty. So, all I'm saying is that if I'm anywhere near correct, the Chinese economic growth has over the last 10 years, and is more likely over the next 10 to 15 years to exceed any of the economies in the developed world, individually or collectively. If that premise is correct, and given where the markets are, you'd go back and have a look at the max lows and current max, the CSI 300, which is a Chinese number one, if you like, this a Shanghai Composite and what have you, uses 300. It's up I think about – well, it's up far, far less, far, far less than NASDAQ, or the S&P, about in line with the ASX.

So, in terms of value and because I think the US dollar is coming down, I would be very cautious about moving at the US but I might want to put some money in China, and you can't pick the stocks individually. The Magellans can, the Peter Warnes' and the Lex Halls shouldn't. Because you'll need a shotgun approach there rather than the rifle. And so, I think the best way is through that ETF, and I think I saw the other day, the VanEck ETF on China and I think the code is CNEW. Just looked it's around about the $9.50 mark or what have you. If I was going to do that and it's front of mind at the moment, that's how I will get exposure to China.