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As emerging economies evolve into developed economies, their GDP rebalances and shifts from being driven by investment to being driven by consumption.This is a phenomenon that we’re beginning to see in China as the world’s second largest economy starts to mature.
However, investors often make the mistake of assuming that when construction slows, it’s time to dump infrastructure stocks and move into consumer stocks.
There’s much more nuance to the China story, noted Deutsche Bank’s David Bianco at a breakfast this morning.
“China construction growth can slow, buts its capital goods demand can accelerate,” said Bianco.
For years, China has focused its efforts on building airports, highways, and cities. However, it still needs to deploy capital goods for all of that infrastructure.
“China demand for capital goods should accelerate as urban living standards improve. China still needs more aeroplanes, trucks, engines, climate control and automation.”
With this thesis in mind, Bianco recommends investors to tilt their portfolios toward “global growth” and “capex plays.” Specifically, he favours industrial and technology sector stocks with exposure to the emerging markets.
Deutsche Bank’s year-end target for the S&P 500 is 1,575.
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