Who’d want to invest in the West these days? The US, as we keep pointing out, is a mess. The economy’s tanking; the property price crash has only just begun; the currency is a disaster; and equities aren’t even particularly cheap. Much the same is true of the UK (it just isn’t so obvious yet) and even the European markets we have long been keen on are beginning to look a bit ropey. Don’t touch them with a bargepole, say analysts at consultancy GaveKal: Europe is starting to experience “the full effects of higher taxes, higher interest rates and a higher exchange rate”. This is a combination that is “usually enough to floor even the toughest economy (which Europe is not)”.
So what’s an investor looking for a safe haven to do? MoneyWeek’s usual answer to this it to buy gold and hang on to it. But much of the rest of the market has a rather different take on things. Buy Asia, says GaveKal, and specifically “Asian equities and real estate”. Why? Because Asia’s economies and markets have now finally “decoupled” from the US – they have developed to the extent that they are no longer dependent on US growth to drive their own growth. This, say the bulls, is the dynamic behind the way the regions’ stockmarkets have entirely shrugged off the credit crunch: the MSCI emerging markets index is currently trading at an all-time high, while the MSCI Bric index (which tracks stocks in Brazil, Russia, India and China) is now trading 6% above even its pre-crunch peak.
So exactly how real is this decoupling? Much of the data seems to back the idea. Consider the most recent trade numbers from the US. Exports are currently rising at more than 14% on an annual basis, while imports are rising at only 5%. Export growth is nearly three times import growth and total exports (which have long been around only half of total imports) now equal 70% of total imports. This, as Jim O’Neill of Goldman Sachs points out in the FT, “is almost unheard of in the US” and it tells us something absolutely vital to our understanding of the global economy.
Those who are bearish on global growth as a whole say that if the US consumer gives up the ghost (as he or she looks to be about to do) “the end of the world is nigh”. But these numbers – which show us that even as the US consumer is cutting back, the rest of the world is stepping up to the consumption plate – say it isn’t. “The world is changing” and global growth is no longer led by just the US. There are many other figures to back this up. In July the IMF raised its global growth forecast for 2007 from 4.9% to 5.2% on the basis, in part, that emerging markets’ economies were proving stronger than expected in the face of a weakening US.
On their forecasts China, India and Russia between them will now account for half of global growth this year. Then look at the actual consumption numbers in China: Chinese retail sales grew 17.1% in July and, says O’Neill, are now “contributing as much to the world” as those in the US. Brazil, Russia and India are seeing double-digit sales growth, too: add their sales to China’s and their consumer spending growth is around 10% – twice that of the US.
Overall, the Brics between them make up 15%-16% of GDP. That may be half that of the US but it’s growing a lot faster and that, say the bulls, is key. Do the numbers in the same way as the analysts at Goldmans and you will see that to July of this year the growth in consumption in the Brics contributed nearly 1% to global growth. In the US it contributed only 0.7%. The point? Incremental consumer demand from the Brics is greater than that of the US for the first time.
And that, says Hamish McRae in The Independent, is “a huge turning point” for the very simple reason that it suggests that even with a US recession “the world could conceivably keep growing”. Goldman is in full agreement on this one. “Our latest leading indicators show that if anything China’s (growth) might even be accelerating,” and there is nothing about that that looks as though it could change the country’s “major underlying longer-term positive dynamic force, namely, urbanisation”. Their conclusion? “Thank God for China.”
But is it really this simple? We write about Asia a lot in MoneyWeek and will happily agree that it is a very different place to the Asia of 1998. There are no more huge current account deficits and no more overvalued fixed currencies; corporate debt appears to be under control; growth is on an upward trend (about 5.5%), while inflation and interest rates are low (an average of 4.4% compared with a mid-crisis level of more than 15%) and better still, in the past five years most Asian countries (India aside) have been running current account surpluses – and healthy ones at that. However, none of this means that Asia is immune to US recession. It isn’t. Look at the numbers a different way – Michael Kurtz’s way, perhaps.
Kurtz, who is Bear Stearns’ equity strategist for Asia, doesn’t buy the decoupling story. Why? Primarily because we can’t really be sure of the extent to which local demand has actually risen across Asia. Much is made of the fact that China has become a growing destination for exports from the rest of the region, but a huge number of these exports don’t end their days in China. Instead, they just stop there to make their way up the value chain: they arrive semi-finished, get finished and are then “re-exported from China to developed markets”. So the fact that other Asian countries now export a lot more to China and a lot less to the US than they used to tells us nothing about Asian resilience to US recession. Note that Thailand’s exports have already dropped back: they grew at 18% in June but only 6% in July and August. Malaysian exports actually fell in June and July as weak US demand cut shipments of electrical and electronic goods.
It’s also worth pointing out, says Kurtz, that while consumption is rising fast in Asia and is contributing to global growth, “even in the richly populated economies of China and India its absolute magnitude is simply too small yet to offset any sizable US consumption slowdown”. Chinese total spending is only equivalent to 10.9% of US spending. And Indian spending in total is only equivalent to 5.6%. “There will eventually come a day when emerging Asia’s consumers punch in the same weight class as their developed world counterparts, but we’re not there yet.”
The basic point here is that it doesn’t matter how you cut it, Asia remains heavily dependent on exports and in particular on the overextended US consumer: the US still accounts for one fifth of Chinese exports. Sure, the impact of slowing American growth might be lower now than it would have been five years ago (when the general assumption was that every 1% change in US growth affected Asia by 2%) but it is still there and it hasn’t been, as Morgan Stanley puts it, “stress-tested” yet. Global growth has been great for years – we haven’t had such a good run since the early 1970s. But while the growth records of emerging economies are bound to beat those of the developed world, that hardly means they are now immune to the global business cycle – nowhere is. And we should also be careful not to buy too heavily into the idea that Asia is a completely changed place. Much improved, yes. But perfect? No. Morgan Stanley points out that although “abundance has bought stability and good growth to emerging economies, it has also brought complacency among policy makers”. Much of Asia still suffers from a lack of human capital, from inadequate infrastructure and in particular from an inadequate regulatory environment, with a lack of genuine competition. The latter should be of particular concern to equity investors as Joe Studwell points out in his latest book Asian Godfathers: a small group of billionaires control vast numbers of Asia’s listed stocks and are expert in making sure that the proceeds of growth accrue to some shareholders more than others.
None of this is to say that Asian markets won’t make fabulous investments over the long term: relative to markets in the west they almost certainly will. It is just to say that it might be premature to think that Asia will be a medium-term safe haven if the US really does go belly up. That said, there may be good reason to think that, despite the fact the decoupling argument doesn’t quite stand up for now, Asia may be a brilliant short term investment, too. In this week’s City View, Simon Nixon explains why investors should be able to make money on the region’s currencies, but Christopher Wood of CLSA also makes a good case for the region’s equity markets to perform well in the near future. As a result of Fed-led central bank easing, he says, the market will be looking for a new place to build a bubble. And given the near-consensus on decoupling, the obvious place for the “next bubble to form” will be in Asian and emerging market asset prices and “related commodity and natural resources plays”.
Money has to go somewhere and for want of anywhere better the amount that “will flow into these markets as the bubble builds will be beyond the comprehension” of most people.
The best Asian fund to buy now
Asia’s new-found position as the world’s great economic hope has seen interest rise sharply – and fund managers in the area have been quick to take advantage. First State is the latest, lifting its annual management charge from 1.55% to 1.75% for two of its funds in the region. That will help it bring in an extra £2.65m this year alone. We don’t like this much so we are pleased to see that there are ways to buy Asia Pacific funds where the charges are actually falling. Barclays iShares, which once dominated the ETF market, is facing competition from Lyxor and Deutsche Bank. The result has been a drop in fees. For example, the iShares MSCI Taiwan (ITWN), and Korea (IKOR) have Total Expense ratios (TERs) of 0.74%. The DBX MSCI Taiwan (XMTW) and DBX MSCI Korea (XKS2) from Deutsche, on the other hand, have TERs of 0.7% and 0.65% respectively. ETFs giving broader exposure include the iShares MSCI Far-east Ex-Japan (IFFF), iShares FTSE/Xinhua China 25 (FXC) and the iShares DJ Asia/Pacific Select Dividend (IAPD), which invests in firms in Hong Kong, Singapore, Australia and New Zealand with a good dividend history.
For anyone interested in India, Deutsche has launched the first internationally traded ETF linked to the S&P CNX Nifty (XNIF). The Nifty is the index of India’s 50 top companies accounting for over 55% of the entire Indian market. The ETF has a TER of 0.85%. Lyxor has similar fund (LNFT), also charging 0.85%. In the more traditional investment trust arena Aberdeen Asia Smaller Companies and Invesco Asia trust have each demonstrated consistently good returns over the years, and are trading at a discount of 13% and 12% respectively. The Asian property market is also performing impressively. The New Star International Property Fund, has exposure in Singapore but also in Japan, Australia and Germany, which makes it a broader play than the iShares FTSE EPRA/NAREIT Asia Property Yield Fund (IASP), which is in Australia, Hong Kong, Singapore and Japan.
For more on ETFs, see ishares.com, lyxoretf.co.uk and dbxtrackers.co.uk.