A quick word on dividends / China is slowing down, but not going into crisis
Stock markets have continued to be depressed, so for the masochistic net buyer of equities, the situation is downright exhilarating.
In this post, let’s briefly talk about dividends on Nasdaq Helsinki. Generous dividend yields contribute to the cheap valuation of the stock market. We will also look at the Chinese economy that’s been populating the headlines. It is slowing down, but China is unlikely to enter a crisis.
A quick word on dividends
In my latest post, I mentioned how the valuation of Nasdaq Helsinki looks reasonable given the quality of the stock market and the challenges faced by listed companies. To prove this, I showed this graph of the forward-looking P/E ratio of Nasdaq Helsinki, which compared to many other markets does not look half bad. Thus, for the long-term net buyer of equities, it is a time to celebrate, even if there is no immediate reward in the form of a share price rise as in 2020 and 2021.
Another way to underline the attractiveness of the stock market is to look at the tax inefficient transfer of money from one pocket to another, also known as dividends.
After all, Nasdaq Helsinki is a place where the growth opportunities for the average company are very limited and therefore their growth investments are made with caution. This means that most of the cash flow after maintenance investments and debt management should be distributed back to the owners.
When the stock market was more aggressively valued a couple of years ago, I remember how few companies had dividend yields above 5%. The average dividend level on the stock exchange was a couple of percent during the period, although Nasdaq Helsinki was heavily affected by Nordea's dividend ban and many companies were cautious in their dividend distribution.
It's different now. The dividend yield of Nasdaq Helsinki's general index is 4.7%.
By ranking Nasdaq Helsinki companies on the Inderes Comparison tool according to the size of their dividend yield, you can see that as many as 36 companies are forecast to pay a dividend yield of more than 5% for this financial year. The top ranks are dominated by banks and financial services companies, which are characterized by low business investment needs. For example, Nordea and the favorite of hardcore dividend aficionados, Titanium, offer dividend yields of well over 8% at current share prices. The median dividend yield for companies paying dividends is 4% for this financial year and 4.5% for next year (paid in spring 2025), according to Inderes' forecasts.
For many companies, the dividend therefore covers or at least compensates for the general price increase. Of course, it is always worth remembering that dividends are money that’s not going into growth investments, they are taxed heavily, and a high dividend yield may also indicate a dividend trap, i.e. the market may anticipate a dividend cut. Be as it may, but dividend yields argue that Nasdaq Helsinki is not expensive now.
You can take a look yourself with our Stock Comparison tool.
As a final anecdote on sentiment towards Nasdaq Helsinki, I would like to highlight this recent headline in Kauppalehti, "Is it worth investing in the miserable Helsinki Stock Exchange?". You don't often see headlines like this, and certainly not when the stock market is in a bubble. Every dog has its day, I guess.
Economic concerns from China
China, the world's second-largest economy, has again dominated the economic headlines. The loose-lipped POTUS Joe Biden summed up the sentiment well by calling China a ticking time bomb, whether the statement was intentional or unintentional. But I also have positive things to say about China in terms of the global economy.
Many companies on Nasdaq Helsinki are benefiting from investment in the global economy, and if China shuts down, the outlook for the Finnish stock market looks a degree cooler.
There are plenty of worries about the Chinese economy. This year, the expected economic recovery looks set to stall, with exports coughing up and big property developers seeking protection from creditors. The skeletons of the shadow banking sector have come out of the closet and into the light of day. Youth unemployment has risen to over 20% and the authorities have so far stopped publishing the statistics. The country's working age population declines, and productivity growth has stalled. The profitability of Chinese companies has plummeted.
The Chinese stock market has been flatlining since the financial crisis and the stock market has been beaten below COVID bottoms in recent times.
Of course, investors are worried about what will happen to the global economy when China, seen as its growth engine, coughs up. While other countries have suffered from overheating and inflation, China is on the brink of deflation, i.e., a fall in the overall price level. Deflation is problematic because it increases the real value of the outstanding debt mass. This makes it more difficult to repay debts.
In the big picture, China seems to be facing its own Minsky moment. Economist Hyman Minsky once argued that a long period of calm growth in the economy eventually leads to instability as various economic agents take on too much debt and risk, projecting illusory stability and prosperity into the future. The Minsky moment refers to a process where a debt-led asset class boom turns into a decline and a debt crisis. The economy alternates between this seemingly stable development and a state of crisis.
As I have mentioned before, China's economic growth model, where the excess savings of its citizens were channeled into investments in modernizing the country, worked brilliantly for decades. After all, China has lifted huge numbers of people out of poverty. But since the financial crisis, these investments have delivered increasingly poor returns. To maintain rapid economic growth, China has built endless condominiums, highways and shopping malls for which there is no viable real economic reason to exist. At the same time, a shocking bubble was building in the country's real estate market.
Now the world's biggest concrete building bacchanal is being replaced by a debt-deflation bubble.
If China were a normal Western economy, we would probably face a deep financial crisis. However, as China is a command economy where the financial market is tightly regulated, many experts believe that China is more likely to face a long and tortuous period of debt digestion, during which the economy will grow slowly. Debts can be restructured, and losses can be swept under the rug at will. The problems for real estate companies began when the authorities deliberately decided to put a stop to the sector's runaway problems.
Despite the dark clouds, the country's economy is expected to grow by more than 5% this year, a respectable performance for an economy that used to grow at 10%. Especially with a weak comparison period behind us due to pandemic lockdowns.
Although in official GDP statistics China is the biggest growth driver to the world economy, in practice it is not the biggest driver of consumption. That role is played by the United States. If the US economy coughs up, the whole world will cough up, because there is no other market that can hold as many goods and services to sell. China's domestic demand is chronically weak, which is why the country relies on demand from the rest of the world. This is reflected in massive exports, although exports have weakened recently.
China produces, but doesn't consume, and that's the nation’s own problem. Unlike other runaway viruses, China's economic flu has a much more limited global spread.
China's GDP is not really worth comparing with other countries, because it says more about Beijing's desire to grow the economy towards its targets, even by force, than about the honest state of the economy. A good example of the country's profligate growth style is the generous support given in recent years to electric car manufacturers and ride-hailing services. Generous growth subsidies led to services and car production for which there was no real demand. Hundreds of firms went bust when the authorities withdrew subsidies. Now there are hundreds of abandoned electric car cemeteries scattered around the country.
What’s more, I just read an apt anecdote in the Wall Street Journal about how the low-income province of Yunnan is building a multimillion-dollar COVID quarantine facility for the joy of fueling economic growth, even though the zero-tolerance policy ended in China a long time ago. The poor region of Yunnan is also, for some reason, home to Asia's largest suspension bridge and more airports than most other provinces. This is a prime example of how, by investing endlessly, you can make GDP figures look as big as you want. However, ultimately, you end up with empty highways across the countryside and a pile of unmanageable debt.
For raw material producers and luxury companies, which have benefited significantly from Chinese money over the past decade, the cooling of the Chinese economy is negative. China's rigidity is probably part of the reason for the weak performance of raw materials in the world. Among Finnish listed companies, KONE in particular has significant exposure to the Chinese construction sector, which is in trouble. There is also no replacement in the global economy for a high-growth economy like China, so the companies that have benefited will have to look for entirely new sources of growth.
However, the overall picture for the Chinese economy is not completely bleak. As mentioned, a crisis in the communist command economy is unlikely. The party puts stability and its own dominance above all else, although it must be pointed out that one-party systems have a historically poor record of maintaining long-term stability.
In any case, China also has a political option to offset weak domestic consumption. In China, household consumption accounts for only 40% of the economy's GDP, compared to 70% in the US and over 50% in the EU. This will require more income transfers to households, i.e., redistributing the slices of the economic pie.
One way to boost Chinese consumption is to strengthen the weak welfare state. However, this rebalancing has been talked about for more than ten years without any concrete political action, and instead the state continues to invest heavily in the country's industrial development as in the Soviet Union's five-year plans. China is still officially a communist country and the transfer of consumer power to ordinary citizens in the Western style is dubious in a system of centralized power. But if it were to happen, China’s domestic consumption could grow rapidly despite the fact that the economy as a whole is taking a breather. At the same time, stronger domestic consumption would feed healthy and sustainable investment, putting the Chinese economy on a sustainable track. And that scenario, too, has its own winners.
Thank you for reading the post! Read analysis and make good stock picks!