David Leslie, MD of Belmont Asset Management in Cape Town, takes a look out how the slowdown of China‘s economy could affect investors in South Africa.

China enjoyed average growth rates of in excess of 10% for the first eight years of the millennium, but growth rates have since slowed to a more sustainable 7 to 8%. From 2000 to 2008, Chinese GDP growth was spurred on by massive export market growth in the wake of China’s 2001 entry into the World Trade Organisation. Other factors driving this growth included cheap labour, a burgeoning population and the sudden availability of disposable income in the pockets of Chinese consumers. Cash flow was high and debt levels over this time remained relatively stable.

Since 2008, however, efficiencies have declined and China has faced a number of significant changes and challenges.

Let’s look first at population growth. Not only has the population just about stopped growing, but the number of those of working age has, in fact, started to decline. The manufacturing sector is in the throes of re-balancing, with minimum wages having increased and average wages now more than double what they were five years ago. Added to this are declining numbers of workers and a general slowing of China’s global trade. The result has been that growth has been propped up by rising debt levels, which are now in the region of 200% of GDP.

The general slowdown in China caused by declining levels of growth and rising debt are also evident in other large emerging market economies, including Brazil and Russia. This trend has resulted in emerging markets recently underperforming their developed-market counterparts. A quick look at the statistics will show that the MSCI emerging market index fell by 10.9% in the first 6 months of 2013, whilst the MSCI world index of developed markets rose by 7.1%.

So what are the implications of all this for South African investors?

The Rand, as an emerging-market currency, primarily tracks commodity prices in the medium term. Likewise, fellow BRICS member Brazil’s currency shows a close correlation with commodity prices, so it’s no surprise that the Rand has closely tracked the Brazilian Real over the last five years. The recent period of downward pressure on commodity prices has meant that the Rand and other emerging-market currencies have come under pressure. South African investors are, understandably, concerned with where the Rand is headed, so let’s look at the impact of China’s slowdown on them.

Quite simply, with the capital intensity of China’s growth over the 2000 to 2008 period having abated, demand for commodities, especially base metals, has inevitably declined together with their prices. As the result of Rand weakness, support for Rand-hedge investments on the JSE will continue and the trend of outperformance of developed markets will maintain interest in offshore asset diversification.

So, investors might wonder whether it’s too late for offshore diversification.

Diversification is an essential part of any robust portfolio-structuring exercise. It is not just a South African consideration fuelled by a devaluing local currency. As you diversify into other markets, your universe of available investments expands. You are presented with a broad spectrum of investment options and opportunities to structure a balanced global portfolio which matches your individual risk profile.

Lower global economic growth means looser monetary policy and low interest rates for the foreseeable future. This is generally positive for equity investors.