So many myths have been shattered in the past few weeks, it’s hard to know where to begin.
We now know that Gordon Brown, the prime minister, has not abolished boom and bust. The proof is all around us – in our collapsing stock market, in our rising inflation, in our falling house prices and, interestingly, in our falling tax revenues.
As Simon Denham of Capital Spreads, a spread-betting firm, points out, if it were really the case that our economy was growing sustainably – that growth was led by the private sector – surely the Treasury’s coffers would be overflowing.
But they are not. Instead the funds flowing in are substantially below expectations, suggesting our growth is little more than a function of ineffective government spending.
We also know that the American consumer will not keep spending forever (the list of disappointing retail numbers is getting very long). We know that the US housing market has not yet hit bottom. We know that the sub-prime debacle is not contained but spreading – and at speed.
And we know that interest-rate cuts don’t automatically make everything okay: markets everywhere remained highly volatile even after the Federal Reserve cut interest rates in the US by a shock 0.75 percentage points in one go.
But the biggest shattered myth of all is that emerging Asia’s stock markets and economies have somehow “decoupled” from those of America. At the end of last year the bulls were insisting that those of us without the stomach to invest in the increasingly volatile West should look east instead to the “safe haven” markets of emerging Asia.
The idea behind the “decoupling” argument is well known – the massive economic growth in Asia, and its apparent stability since the currency crisis of 1997, has shifted the region to a position where it is no longer dependent on the US to drive its growth.
There were hordes of statistics around to back this up. The IMF raised its global growth forecasts in the middle of last year on the back of strong growth in emerging markets. Meanwhile, double-digit retail sales growth in China, India and Russia added grist to the mill of the idea that domestically driven growth was a reality.
There was much talk from analysts at investment bank Goldman Sachs about how the Bric countries (Brazil, Russia, India, China) added more to global growth in the first half of last year than America. Global investors reacted to this flood of happy news by pouring money into the region, buying the good and the bad indiscriminately and pushing up stock prices across the board. The MSCI Asia Pacific ex-Japan index ended the year up over 35%.
But while the whole decoupling theory sounded plausible and provided the bulls with a reason to do what they wanted to do – keep money in the markets – I’m not sure it ever really added up. The Asian economies have clearly moved mountains since 1998 and it is absolutely true that domestically fuelled growth is coming through.
But that doesn’t mean that Asia is immune to US recession. It isn’t.
It might look as though other Asian countries have started to export to China in big volumes, but their exports aren’t necessarily destined for the homes of the Chinese. Instead, they are finished in China and exported on to the West, and are therefore highly dependent on the American economy. And as Stephen Roach of investment bank Morgan Stanley points out, the leading Asian economies, while much bigger and more influential than a decade ago, are still pretty tiny in the great scheme of things.
America’s is a $9 trillion economy and as such dwarfs the size of the Chinese and the Indian economies ($1 trillion and around $650 billion respectively). Chinese total spending is still only about 10% of that of the US, while the equivalent figure for India is just 6%.
So however fast China and India grow they just aren’t big enough yet to fill the void that will be left in the global economy by a US recession. And they aren’t self-sufficient enough to prevent their own growth slowing as America’s does.
This is something the region’s stock markets have finally begun to reflect. Asia’s markets are no longer moving independently of America’s. Instead, when there is a glimmer of hope in the US and the Dow rises, so do all Asian markets. And conversely every time reality returns and the Dow falls so, too, does Asia. The final result has been carnage.
So far this year Hong Kong’s Hang Seng is down 15%, as is India’s Sensex 30. Most other regional markets, including the Shanghai SE Composite, Korea’s Kospi, and Singapore’s Straits Times, are down around 10%.
I spoke to one of Asia’s biggest fans, Jim Rogers, last week and even he acknowledged Chinese growth would slow this year. However, he doesn’t see this as a problem. Far from it. Instead he sees it as a fabulous opportunity to buy into one of the best long-term opportunities there is.
When I spoke to him the Shanghai SE Composite index was trading at about 5,400, and he said 4,800 would be a good place to buy and 4,000 would be brilliant. Today the index is at 4,700. The brave might want to take him at his word.
The less brave might want to hold off for a bit and see what crisis hits the US economy next. I last wrote here about Asian markets back in September when I pointed to several US-listed Asia investment trusts – Schroder Asia Pacific, Edinburgh Dragon, Henderson TR Pacific – trading at hefty discounts to their net asset value, but I didn’t suggest you buy them. Wait a few months, I said, and you should be able to pick them up at an even bigger discount.
Today you can do just that, but under the circumstances perhaps now isn’t that great a time to buy them either. Another few months perhaps?
First published in The Sunday Times 27/1/08