The natural rate of growth for an economy is a combination of how many workers there are (population) and how productive they are working (output per unit of labour costs). Simply put, how many widgets do we produce and how many workers do we have producing them. If you want to boost growth naturally, you need to have policies to improve these fundamentals. China, like many others, has relied on credit expansion for decades to boost growth amidst worsening demographics. As debt levels grow, this avenue will be increasingly challenged and is behind why central banks have had to monetizing debt levels. History is clear here. The more debt we have, the slower trend growth becomes. The credit cycle is very clear here.

The world’s natural growth rates have been declining for decades. China’s latest census has shown that trend to be accelerating and is likely the catalyst for this new policy.

Here is a great link to look at the population growth trends through 2100. If birth rates do not improve, most of the world population will be shrinking save for Sub-Saharan Africa. This makes is hard to generate growth and is likely why we will see Modern Monetary Theory and Quantitative Easing and policies like it continue to expand. The idea of getting rid of them is laughable from a political perspective. Markets sustained off “low rates” are in for more volatility too. And sadly, the yield from bonds will no longer help smooth out your returns.

The other way to boost growth are policies that make workers more productive. THIS DOES NOT INCLUDE USING CORPORATE PROFIT TO BUY BACK SHARES. It involves investing in productivity enhancing measures. Here is where there is great reason for optimism. Technology and innovation will be a huge growth factor for as far out as one can look. But like we are seeing now, it will lead to (boom bust) bubble like results (see crypto markets). Have a look at Chinese A-Share ETFs compared to the S&P 500 and S&P TSX ETFs. We see several periods where Chinese markets dramatically outperformed US and Canadian markets only to “bust” after the boom. The outperformance of the US market in recent years has mostly come from the huge technology weight. The TSX is yesterday’s index. The TSX has a 9.5% weighting in technology and almost 6% of that is Shopify (SHOP). If the FANGMAN stocks were in the TSX, it would be the #1 market.

We doubt that allowing people to have more children will work, but it probably will not hurt. It is not a reason to add China to your portfolio. In the developed world, there have been no restrictions on birth rates and the trends have been declining for decades. We think that policies designed to boost productivity are needed and will help for sure. Therefore, it is less about investing in China, Japan, or the US markets than in companies that will benefit from these growth trends.

It will also mean that there will likely be more volatility in returns and when inflation threatens growth, like it is today, technology stocks will have a far bumpier ride. The best example of this can be seen in the great portfolios that ARK Invest ETFs focus on. The stocks in the ARKK ETF have a dividend yield of 0.05% so they are pure growth plays. Buy the dip, but the dip probably has more to go!

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