In May, SFG’s Investment Team traveled to New York City to visit our investment managers, discuss their investment portfolios, and get their global macro views. Here are a few takeaways from the meetings:

• China’s impending demographics: China’s population is expected to start shrinking around 2030. With the population aging and reproduction rates falling, the debt levels will begin to be felt as growth slows. If you would like to learn more about the impending demographics in China, please read about it here on George Friedman’s site, Geopolitical Futures.
• China SOEs: Approximately 80 percent of China’s markets are state-owned enterprises (SOEs). Most investors are playing on the stories of Alibaba and Tencent — both of whom experienced incredible growth over the last few years — to gain exposure to Chinese consumers. Additionally, because both companies are domiciled in the Cayman Islands (versus China), corporate governance adds another layer of risk.
• Debt in Japan: Japan is plagued with debt because of its quantitative easing programs over the last twenty years. The Bank of Japan currently owns over 60 percent of all ETFs in the country, and the 10-year treasury note yield is .05 percent. These facts, combined with no mergers or acquisitions and a low-yielding culture, have left our managers treading lightly in Japan.
• Credit mania in Europe: With so much capital in the market reaching for yield in a low-interest-rate environment, the ability to price risk in the high yield markets has all but vanished. Additionally, if a credit manager wants to rotate their portfolio to higher quality, they take on significant duration risk as investment grade markets sit at around 6 to 7 year durations.

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