Christopher Wood of CLSA Asia-Pacific Markets is worth listening to, says Leslie Norton in Barron’s. He flagged the likely global impact of problems in the US mortgage market as early as 2005 and also saw trouble brewing in Thailand before the Asian crisis of 1997.
Now he says long-term investors should steer clear of the Western world. Amid the deflationary backdrop of indebted consumers deleveraging and damaged banking systems, the “best case is a long period of subpar, anaemic growth”.
Asia and emerging markets, on the other hand, look set for a bubble. A bubble “somewhere” is “almost inevitable”, given the massive global monetary easing that’s taken place.
Money flows to the most appealing investment stories – now Asia and emerging markets – “the only genuine growth story in the world”. They enjoy scant consumer, corporate and government debt. Thanks to high savings rates, they are “in much better condition than the developed world”. A bubble should push Asia to two or three times the p/e ratio of the S&P 500 (yet the p/es are currently about the same).
The key markets are China, India and Brazil. China’s blue-chips are dominant, state-owned firms with little competition. Brazil has a range of commodities and now it’s “finally cracked” inflation it can lower interest rates and stoke long-term consumption. India offers a Western-style legal system and diverse sectors, making it “my favourite emerging market”.
Stocks Norton likes include Chinese internet search engine Baidu, China Life Insurance, Indian bank HDFC and Hong Kong’s Sun Hung Kai Properties. But while stocks such as these are worth watching, jumping into emerging markets looks risky.
Wood expects the S&P 500 to fall again in the next few months as investors adjust to the gloomy outlook for stocks in the West, and emerging markets will be unable to escape the US-led global trend.
But with Asia and emerging markets in sound structural shape and more investors realising it, their long-term future is bright.