Many investors will have lost money over the past few days.
But although rocky markets can easily induce panic, it’s worth taking a long-term view and remembering that global market jitters offer the opportunity to buy compelling growth markets more cheaply. This means you can look forward to handsome returns in the next decade or so. Here is a round-up of MoneyWeek’s favourite markets to keep an eye on and buy into when the dust settles.
Japan: recovery will continue
After hitting a near seven-year high, the Nikkei 225 index has retreated along with other markets, notching up its worst fall since last June early this week (see chart). It is marginally in the red for the year. But the bigger picture is positive. The longest recovery since 1945 continues, with year-on-year fourth-quarter growth unexpectedly strong at 4.8%. Exports (up 11% from a year ago) and business investment growth (at a five-year high of 16.8%) are both buoyant, and the Bank of Japan has signalled its confidence in the recovery by raising interest rates to 0.5%.
Deflation is making a painfully slow exit, however – indeed, it fell back to zero in January. And consumption has proved to be the missing link in the recovery, climbing only marginally in 2006. While household spending ticked up for the first time in 13 months in January, wages fell. Still, there are grounds for optimism on this front.
The labour market has not tightened as quickly as expected, says Christopher Wood of broker CLSA, but with unemployment at an eight-year low of 4%, it is doing so gradually and will “get traction sooner or later”, especially since “the Japanese are not about to adopt a libertarian approach to immigration”. Nor should investors worry about deflation. The Bank of Japan’s view – that inflation is on the up in the long term as the economic recovery endures and use of production capacity and labour improves – makes sense.
Unjustified jitters over deflation may pose a near-term risk, but Tokyo is “four years into a secular bull market”, says Wood. Companies have been delivering the highest return on equity of the postwar period, and valuations are historically cheap. Falls in domestically orientated stocks herald a buying opportunity as the market gradually “moves to discount the end of deflation and the resulting normalisation of interest rates”.
This should provide investors with currency as well as equity gains in the years ahead as the undervalued yen climbs along with interest rates, helped along by the unwinding carry trade.
For a more in-depth look at the Japanese market, see our recent cover story: Why you should invest in Japan now
India: the “most attractive stockmarket in the world”
India’s benchmark Sensex index, up more than threefold over the past five years, is now around 15% below its 2007 peak of early February. And the slide is unlikely to be over just yet, says Andrew Beal of Henderson: a further correction looks overdue, given that both inflation (currently almost 7%) and interest rates are on the rise, and the market remains relatively pricey on a p/e of 17.
The Bank of India is clearly worried that the economy, growing at 9.2%, is overheating, says Rahul Saraogi of Atyant Capital. It has clamped down on lending by hiking banks’ reserve requirements for the second time in under three months. But the Bank is acting prudently; tempering the boom now will provide scope for the supply of labour and infrastructure to catch up with demand, easing bottlenecks in the economy and “encouraging stable growth for years to come”. India’s market has just run ahead of its “splendid long-term growth outlook”, says David Fuller on Fullermoney.com.
India is “the most attractive stockmarket in the world”, agrees Jim Jubak on Moneycentral.msn.com. It has reached the stage where consumption is taking off, and there is vast potential on this front: just 2% of the population currently have credit cards and only 15% own a refrigerator. Demographics are in its favour. It has a younger population than China’s, and its corporate governance is also better than that of its major rivals. The corporate culture also “takes much better care of shareholders” – Indian firms’ return on equity is 21%, making them more profitable than their American counterparts. Small wonder, then, that David Fuller will be “adding to a core investment position” once the current “corrective phase” is over.
Find out how to profit from India’s M&A activity in our recent cover story, How to profit from India’s M&A battle
Vietnam shrugs off global turmoil
Global markets may have hit the skids last week, but Vietnam’s didn’t. The key index has been steady over the past few days and is up by more than 50% this year, having soared by 145% last year. It seems investors have been too busy pouring money into the country’s small market to worry about the global picture; Credit Suisse recently warned that Vietnam is attracting so much money that it needs to curb “excessive exuberance” in its market, says Wes Goodman in the International Herald Tribune.
You can see why investors are keen. The government has just forecast a fifth year of growth above 7% – GDP growth is currently humming along at 8% – thanks to vigorous privatisation of previously state-owned companies. Vietnam’s recent entry into the World Trade Organisation should give exports (mostly commodities, though manufactured goods are catching up fast, now expanding at 20% a year) a further fillip. Personal taxes have been cut and corporate taxes set at 10% in certain zones designated for foreign investment. Throw in a burgeoning middle class and GDP per head still over 20 times lower than South Korea’s, and it’s no wonder foreign investment rose by 49% to $10bn last year.
In Vietnam, “conspicuous consumption meets foreign direct investment and capital market expansion”, says Merrill Lynch’s Spencer White, who has called it a “ten-year buy”. Among the few ways in to the country are the Aim-listed Vietnam Holdings (VNH) and Vietnam Opportunity Fund (VOF).
For more on investing in Vietnam, read: The exciting growth potential of Vietnam
Singapore: gateway to Asia’s boom
Until the global market slide this week, Singapore had begun to outpace other Asian markets. And no wonder, says Kopin Tan in Barron’s. Thanks to its first-class infrastructure, educated workforce, generous tax breaks and negligible corruption, it has established itself as the gateway to Asia’s booming economies. The World Bank deems it the world’s “easiest place to do business” and the government is renowned for its prudence: it will set aside 5% of GDP this year. Singapore is “probably the best-run country in the world”, Felix Zulauf of Zulauf Asset Management told Barron’s.
Singapore is also diversifying away from its IT and electronics to more profitable industries, such as medical research and oil refining, and it has become a highly competitive financial centre. It will soon be the Zurich of southeast Asia, as Merill Lynch’s Spencer White puts it. Unsurprisingly, growth is booming, almost reaching 8% last year. That suggests that property prices, which are now gathering momentum, have much further to go. Merrill Lynch’s Sean Monaghan expects prime office rents to jump by 45% by 2009, owing to rising demand and limited supply. That bodes well for banks, whose loan growth Merrill Lynch expects to hit double digits in the next few years, for the first time since the mid-1990s.
Given all the above, Singapore looks likely to grow strongly for years to come, says Tan, although its export-heavy market means it would not emerge unscathed from a global slowdown. Felix Zulauf recommends the US-listed ETF tracking the market (weighted towards property and banks) as a “classic way to play the rise of Asia”. He predicted in January that the market looked likely to tumble in the medium term and said that he would wait to buy in, but he added that the ETF “will be a lot higher” two or three years from now.