A Long View of Emerging Markets
|Jan 6, 2010|
The dangers of judging the investment world by decades and the short memories of most investment analysts and advisors has never been more evident.
The end of the decade of the "noughties" has resulted in a deluge of commentaries focusing on the huge outperformance of emerging markets in general and Asian ones in particular compared with the west and developed world in general. Most of the latter are lower now than they were a decade ago while emerging ones (headed by Russia) are showing gains of up to 1,000 percent.
All this is supposed to reflect a massive shift in global economic power (and political influence) from the old west to the young east. The gee-whiz commentators appear not to have noticed that that process has been going on for more than a century. For sure, China and India have made a particular mark over the past decade, but in reality that is no greater than the advances made by Korea, Taiwan and much of Southeast Asia in the preceding three decades, not to mention Japan's century of achievement – interrupted for a decade in mid-course.
It is the stock market performances however which are particularly misleading. For sure, all Asian markets except Japan have outperformed their western counterparts, in some cases massively. However, a decade is an arbitrary number. Make the comparison 13 or 15 years and a totally different picture emerges. For sure, the rises of China and India remain spectacular by any standard. But these to a large extent reflect some unrepeatable local conditions. China's moves to stock-owning and listing of state enterprises were in their infancy and foreign ownership of Chinese shares very limited. Likewise India was in the early stages of its reform and opening era. They have both shown very high levels of volatility.
Elsewhere in Asia the picture is very different. The beginning of the decade showed most of Asia still recovering from the shock of the Asian crisis and thus only half-heartedly taking part in the IT-driven bull market then close to its climax in the US. Western markets have thus had a decade of two bear shocks, firstly the collapse of the IT bubble and then the 2008 financial sector melt-down. Asia's bear market ended in 1999.
Go back a little more than a decade and Asia ex-China and India has mostly underperformed the major western markets. Hong Kong for instance, despite the massive influx of mainland Chinese shares into its Hang Seng index is only some 20 percent up on its 1997 peak and the main property drivers in that bull market are now mostly languishing below their last-millennium highs.
The Malaysian market is still actually below its mid-1990s peak, at least when measured in US dollar terms. The same applies to Thailand. Those two markets were seen as the "wave of the future" 15 years ago and attracted huge amounts of foreign portfolio money. Just like China and India today.
Taiwan's peak of 12,000 was almost two decades ago and it still needs a 40 percen rise to get back there. Meanwhile it has been back up to 10,000 and down to 5,000. Korea has performed rather better with the Kospi index now at 1,690 compared with a 1990s peak of around 1,100. But that gain has been partly eroded by a decline in the won.
If much Asian market performance over the past 15 years has been worse than many imagine, the opposite applies to many of the now relatively depressed western ones. Even the UK market is still 20 percent above 1997 levels and 50 percent above 1995. Likewise the S&P 500, the broadest of the US indices, is up around 50 percent.
Of course it remains true that growth in Asian will remain far higher than in the west. Asian catch-up and demography both ensure that – though in many Asian countries this will be the last decade when their demography is superior to the west. It is also quite likely that the west will follow Japan's experience with a second decade of zero growth or actual decline in stock prices. By the same token, some Asian markets look quite cheap and may well have a decade of advance in front of them.
The Thailand and Malaysian markets for example would probably be a lot higher if the politics improved, and Singapore and Hong Kong have several counters which offer good yields and are not prone to bubbles and busts. Korean companies continue to advance on the world stage and the scope for increase equity ownership by pension funds could be a further boost. Taiwan may still look a tempting morsel for cash rich mainlanders. All these markets look rather less vulnerable to reverses than China, India or Indonesia. So the new decade may well see another change in Asian pecking orders.
As for other emerging markets, Latin American has mostly had a good run. But Argentina's performance is not much to shout about once devaluation is taken into account. Brazil has benefited hugely from both the end of hyper-inflation in the mid-1990s and the commodity boom of the past five years. But neither looks likely to be repeated in the near future and the potential for setbacks is huge. Commodities have of course also been the main reason why Australia has outperformed almost all other developed markets in recent years.
Whatever happens, it remains crucial not to be fooled by the arbitrary use of a single decade to judge long-run performance.