Have you seen the film, Emperor? It’s about Japan after its surrender at the end of WWII. The main character, General Fellers, is tasked with deciding if Emperor Hirohito – a man worshipped as a God – will be hanged as a war criminal. The fate of a nation depended on a single Westerner, who had just ten days to interview senior politicians and royal aides. In the end, Hirohito is spared. The Americans concluded it wasn’t possible to prove his guilt.
The Japanese were spared another devastating blow to their national pride. And they went on to completely turn their fate around in the post-war years. Gutted and impoverished, the country brought in constitutional amendments, land reforms and other structural changes that improved its competitiveness. Its economy blossomed.
The film got me thinking about the power of political reform, and what it can do for economies. Fast forward to today and Asia’s new emerging markets face less severe problems, albeit ones that have hammered its stock markets.
Foreign investors and pundits seem to be hell-bent on finding faults over here – prompting a vicious cycle of sharp outflows, falling stock markets and declarations that emerging markets as an asset class are dead.
But the pundits are ignoring Asia’s vast ability to change, and adapt to new circumstances. And I think sweeping reforms underway right now will drastically change the way investors view Asia in the coming years. Perhaps the most visible is the end of China’s ‘one-child policy’, which spawned a generation of children without siblings, or ‘little emperors’. But that’s really just the start. China is gearing up for a bout of reforms to rival the changes it made two decades ago, when it first opened up to the world.
And its neighbours are following suit. Let me give you some examples.
Asian countries are pushing for reform
The Chinese economy has had a great run since it joined the World Trade Organisation (WTO) in December 2001. But now there are signs of fatigue.
A number of reforms are needed, particularly shifting from investment-led to consumer-led growth. We’ll see if the government is serious about this in October, when the Communist Party is set to hold a landmark plenary meeting on economic reforms. Twenty years ago, a similar meeting set the tone for China’s move towards capitalism.
The most imminent is the end of the one-child policy. Many expect the government to allow families where at least one parent is an only child to have two children by the end of the year. And it’s possible that all families will be allowed to have two children by 2015.
According to Bank of America Merrill-Lynch, relaxing the one-child policy would mean an extra nine and a half million babies – equivalent to the total population of Sweden. That will give consumer demand a nice boost.
Singapore is also facing pressure to change, in spite of being labelled the ‘Switzerland of Asia’. It’s grappling with high costs, rising property prices and citizens who want less dependence on foreign workers.
At the recent 2013 National Rally Speech, Prime Minister Lee Hsien Loong announced measures to tackle rising inequality, an ageing society and the adverse effects of globalisation.
Examples of reforms included moving the Paya Lebar Air Base 15 kilometres east to Changi to free up land for new homes, offices and factories. The government has also promised that every working family will be able to afford a home, and is offering grants to buyers.
The Indonesian president, Susilo Bambang Yudhoyono, has announced a bundle of measures to address the widening current account deficit, rising inflation and slowing growth. The main aims are to speed up infrastructure projects, to boost investment with tax incentives (like holidays and allowances, research and development incentives and simpler permits), to reduce imports with higher import taxes on luxury goods (including cars) and relax quotas on mineral exports (while keeping export tax at 20%).
In Malaysia, Abdul Wahid Omar, a government minister, says the country needs to rationalise state subsidies and remove broad-based subsidies. The government is aiming to bring the deficit down to 3% by 2015. He added that Malaysia’s economy is likely to perform better in the second half of this year. The Malaysian 2014 budget, due by the end of October, is likely to provide more details on how the country intends to change.
November could be a great time to pick up bargains
A lot of sceptics will say this is all hogwash. But based on my experience working in Asia for almost two decades I think that view is inaccurate. When I started working in the region, most markets were either colonial backwaters (Hong Kong, India, Malaysia and Singapore) or barely functioning (China, Indonesia, the Philippines and Vietnam).
As we all know that has now changed profoundly.
Another argument from the critics would be that, unlike Japan, these markets don’t have the benefit of a buoyant Europe and US. Point taken. But what they have instead is the chance to capitalise on the rise of emerging markets itself, offering tremendous opportunities to foster trade links between Asia, Africa, Eastern Europe, Middle East and Latin America.
Perhaps less appreciated is the transformation of the people on the ground. When I deal with local professionals in the financial industry, corporations or government, all of them have read the same textbooks about business and economics as my peers in the City. And there is also grassroots support for political change, evident in recent elections in Malaysia, the Philippines and Thailand.
Let’s be clear: a lot of change is taking place and it’s likely to accelerate in the future, ushering in a world where emerging markets will play a significant role.
My best bet is that the current sell-off will ease off over the next two months, coinciding with the seasonally strong November to February period. For brave investors, it offers a chance to buy some of these markets at bargain prices.
Gloom mongers should contemplate the famous lines from Orson Wells’ The Third Man (1948): “Don’t be so gloomy. After all it’s not that awful. Like the fella says, in Italy for 30 years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love – they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.”