2014 Outlook: Kunghei Fat Choi,
Part 6 - Asia & Rest of the World
China
Depending on your view, China is either the future
economic powerhouse or the home of huge credit and property bubbles. Those
who invested in the Fidelity China Region fund 15 years ago would have fared
better than the same investment in the S&P.1 That
said, the annual compounded return would have been 5% - not exactly the
world’s latest great growth story.
USD-THB Exchange rate 2009-2014
Source: Bloomberg
On the other side there are the stories of the ghost
cities and newly-completed empty shopping centres. Growing cynicism about
Chinese economic data combined with concerns about the imbalances generated
by years of financial repression, the latest being the wealth management
products fiasco, seem to be building a perfect storm for China. Creative
destruction could well bring about the kind of change that emerging market
guru Dr. Mark Mobius of Franklin Templeton described while speaking at an
event in Bangkok last year:
“Many of the existing public companies in China will not
be able to adapt as they would need to do to be able to survive the changes
that will take place in China in the coming years. Conversely, many of the
companies that will be the winners in the new landscape haven’t even been
formed yet or are still private, unlisted companies or if they are listed,
they might be the smaller companies that nobody has even heard of yet. This
creates great investor risk but enormous investor opportunity.”
Mark Mobius is one of the few who has the skill and
experience to exploit the opportunity - I worry that many investors will
simply take the risks and not participate in the rewards.
Japan
As mentioned above, Japan has a demographic crisis on its
hands: the population is getting older and in 20 years’ time, one worker
will be trying to pay for the upkeep of four people.2
Abenomics will not be able to change that and yet the Bank of Japan seems
determined to print, print and print more money. Its last attempt at this
was in 1930s and led to hyperinflation, political upheaval and an
expansionist policy that brought it into war. It probably wasn’t the wisest
political move but Japanese finance minister Taro Aso’s comment that the
elderly should be allowed to “hurry up and die”3
epitomised the pressure on a government which is borrowing half of its
national budget every year.
Thailand
Whilst Mark Mobius’s assertion that the local economy and
its politics usually act as if they’re barely acquainted is correct, GDP
grew by only 0.6% in Q4 2013. Overall, the economy grew by 2.9 last year,
down from 6.5% in 2012. Of course it is all too easy to blame the protests
alone: the government has seemed hell bent on disrupting a flourishing
economy by indebting the country with schemes such as subsidies to
first-time car buyers and the rice-pledge scheme. The latter guarantees
buying rice from farmers; as the state has not managed to sell on most of
the rice and there are accusations of widespread corruption, the cost has
shot up from USD 15.5bn to USD 21.6bn.
Thai Stock Exchange (2009-2014)
Source: Bloomberg
All that said, the Thai stock exchange index is at a
similar level to that of June 2012 and, while the Baht has weakened since
the protests began, it is far stronger than 2009 levels. It seems Mobius is
correct after all but few other markets have receded that far; so at these
levels Thailand’s capital markets, notwithstanding the risks, may actually
be one of the better opportunities.
Brazil
The strength of its currency, the Real, has made Brazil
an expensive place to do business. The Real was at 3/USD in 2004, then went
as low as 1.55/USD at some points in 2008 and 2011 had a median of around
2.2/USD last year. It is estimated that more than 40 million people have
emerged from poverty in the last decade into a rapidly growing middle class.4
Nevertheless, forecasts for economic growth in 2014,
which were originally set 1.90% have been pegged back to 1.79%. One concern
is that the country has spent and is continuing to spent vast amounts on
sporting facilities for this year’s football World Cup, where some host
cities require new airports and roads; and the 2016 Olympic Games in Rio.
Argentina
In 1914, Harrods decided to set up shop overseas for the
first time. It chose Buenos Aires as the starting point. At the time,
Argentina’s GDP per capita was greater than that of Germany, France and
Italy.5 It is now what former US secretary of state
Henry Kissinger called a “dagger aimed at the heart of Antarctica.”6
Chileans and Uruguayans are now richer. In mid-January, the central bank’s
reserves went below USD 30bn, forcing the government to stop injecting vast
sums of dollars into the exchange market to support the over-valued peso.
This sent the peso crashing down from ARS 7 to 8 per USD in just over a day.
Products were pulled off shop shelves and retailers started to mark up the
prices of the goods which remained.7
Africa
As Collum points out8, “Africa has
no ports [well, few, anyway] no inland waterways, no property laws, weak
educational systems, more AIDS than any region of the world, a large
machete-toting populace and numerous oppressive dictators.” It is truly
difficult to see a way out for the continent in the near future.
Summary
It’s clear that 2014 will be another challenging year for
investors - but with no end in sight to the problems that plague markets; so
that remains the hand that we’re likely to be dealt for many years to come.
Last year was the year of the central bankers and their
generosity was appreciated by US equity investors. What effect tapering will
ultimately have on US and other capital markets remains to be seen, as
indeed does the whole impact of the consequences of the great fiscal and
monetary experiment. This experiment has been conducted for some 30 years
now but which is gathering pace like the final scenes in a horror movie
building up to a climax.
However, none of us really knows whether that climax will
occur this year, next year or beyond or whether it will be dramatic or
anti-climactic. What is clear is that, in such uncertain times, pragmatic
diversification across asset classes remains the best chance to avoid sudden
downturns and to capture the various and unpredictable opportunities that
are being thrown up. Focus on a single asset, asset class or even investment
methodology and you might be lucky for a while but the chances of luck
guiding you successfully to the end of the investment marathon aren’t good.
Trusting in diversification is a more reliable way to
achieve a desired outcome. Above all, understand your liquidity and risk
tolerances and make sure you adhere to them - one of the main themes that
I’ve seen over the last few years has been the pressure on investors to
deviate from their own risk profile to chase returns - of course this is OK
when they get away with it. However, in the long run that doesn’t happen and
I hear of so many investors, personal, professional and institutional, who
have thrown away their investment compasses in the pursuit of yield or
return, that I know that this is a story that on a massive scale is going to
end very, very badly. My best advice is that if 2014 turns out to be the
year of reckoning, don’t let yourself be among the vast majority who are
caught out.
Footnotes:
1 2013 Year in Review, David Collum
2 Richard A. Marin, Global Pension Crisis
3 www.theguardian.co.uk/world/2013/jan/227elderly-hurry-up-die-japanese
4
http://www.bloomberg.com/news/2014-01-23/the-mirage-behind-brazil-s-economic-miracle.html
5
http://www.economist.com/news/leaders/21596515-there-are-lessons-many-governments-one-countrys-100-years-decline-parable
6 2013 Year in Review, David Collum
7
http://www.theguardian.com/world/2014/feb/01/argentina-peso-crisis-shakes-queen-cristina
8 2013 Year in Review, David Collum
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