My name is Lars Stig Tore Henriksson. I was born in Kalix, a tiny town in northern Sweden, famous for its beautiful archipelago where a fjord enters the Gulf of Bothnia. And this makes me a Viking.
For most Brits the Vikings were all about conquest, expulsion, extortion and commerce. But the Vikings were also great travellers of the seas, with well-crafted wooden long boats, they went in search of ripe rewards. Their lasting legacy was the formation of the independent kingdoms of England and Scotland. But what is less appreciated is that many of us, particularly from Sweden, travelled and traded with various people along the rivers in the East and helped to found Russia and ventured as far as Asia.
I regard myself as a modern Viking. I’m equipped with a computer, brief case, passport and a deep desire to understand the people I am dealing with in the East. I’m in search of those ripe rewards. By travelling around Asia and talking with local businessmen and natives, I’ve learned some valuable lessons.
One crucial lesson we must all remember is not to panic when the markets don’t seem to be going your way. This is one of those times.
The Jakarta index has taken a bashing in recent weeks – but I strongly believe the current sell-off is just a temporary setback paving the way for great returns for savvy investors. And I say that as someone who has learned a great deal from similar situations in the past.
What Thor taught me about investing
According to Norse mythology, Viking warriors who died a glorious death in battle went to Valhalla. In Valhalla, each morning Vikings would pick up their weapons and put on their armour and then walk to the big plains in Asgard to fight. Regardless of the outcome and lost weapons or limbs, everything would be restored in the evening so they could enjoy a great feast and drink. They ate steaks cut from a giant pig which miraculously grew back immediately.
There was also a goat named Heidrun which stood on the roof of Valhalla and ate from the branches of the tree of life ‘Yggdrasil’. Mead streamed from Heidrun’s udder down to a huge tub, big enough to make everyone in Valhalla drunk every day. The Valkyries would serve this mead and pork to the Vikings.
Thor, the son of the chief god, Odin, was armed with a hammer that returned to his hand after he hurled it at enemies, a belt that doubled his strength when he wore it, and iron gloves that helped him to use the hammer effectively.
Back on planet earth, life is much more uncertain. Take stock markets. They tend to move in a non-linear way in the short term, often punctuated by sudden stops or changes of direction. Sometimes they even suffer terrifying collapses that wipe out the savings of whole generations of investors.
So they are hard to forecast.
One good example for this is that the average US hedge fund has gained a mere 4% this year when the S&P 500 is up 20%. Less than 5% beat the index and a quarter of them actually made a loss. The culprit was that there were too many short positions, meaning that many of them doubted the robustness of the market. Even the greatest minds in the investment world fail to get it right.
Three Asian bear markets that taught me a valuable lesson
And there is even less expertise when it comes to emerging markets in my opinion. Most emerging stock markets are young, roughly 20 to 30 years old. By nature, they are fast changing, which often means that investors find them difficult to understand, resulting in the common strategy of ‘sell on rumours and check the facts later.’
This is what is happening now.
I think it essential to take a step back and share with you what I have learned from my 20-year battle with the markets in Asia. During my investing career I have experienced three clear Asian bear markets.
First, in 1997-98 I was working as an investment analyst in Kuala Lumpur and I saw how Asian currencies melted away, foreign investors dumped local shares and local investors were saddled with massive losses.
Secondly, in 2008 I was working as an investment advisor for an asset management firm based in London’s West End. My colleagues and I saw the Asian markets dropping like a stone when the Lehman Brothers debacle occurred. Brokers stopped calling and the normal flow of companies, analysts and strategists coming to London to share their views came to a stop.
Thirdly, in 2013 the Asian markets were doing OK until the end of May when the Federal Reserve’s Ben Bernanke hinted at tapering off quantitative easing later this year. It has resulted in massive withdrawals of hot money, mostly from bond funds, which have had a knock-on effect on foreign exchange rates and stock markets (through margin calls and change in sentiment). We are still going through this phase.
Why I believe Asia will recover from this blip
So what lessons did I learn from these events?
In the short term (next one to two months), the herd mentality rules. This leads to flows which dictate stock-price movements more than underlying fundamental and actual earnings performance. Brokers are competing to cut their targets, and investors are being left to fend for themselves, paving the way for indiscriminate fear and selling.
Flows to emerging markets have turned into a sea of red as investors have pulled out billions of dollars from markets deemed to be most sensitive to change in global liquidity.
But fundamentals are improving. Taiwan’s export orders, a leading indicator of demand for Asia’s exports, rebounded in July after five months of contraction bolstered by demand from China and the US, hinting at stronger retail figures in the third quarter of 2013 for Asian exporters.
US manufacturing grew in July at its fastest pace in two years, while European factories snapped a two-year run of declining output, suggesting a prolonged recession in the eurozone might be nearing an end.
There are also a number of events to watch out for in September: (a) the Fed’s policy decision on whether to cut back its asset purchases and by how much; (b) a possible White House decision on who will succeed Mr Bernanke; (c) more political tussle as Congress and the White House face off over measures needed to keep the government running and avoid a sovereign default; (d) the German election where Chancellor Angela Merkel is heading towards likely victory; and (e) turmoil and problems in the Middle East.
In the medium term (three to 12 months), what really counts is the health of the global economy and policy responses to competitiveness and growth challenges faced by emerging economies.
We should have more clarity about the sustainability of the pick-up in economic growth and policy responses. For instance, Malaysia will announce its annual budget in October. The Third Party Plenum in China will provide more clarity on the new government’s structural policy goals. As we know, policy remains paramount to China’s stock market.
There will also be a number of elections such as the Indian general election (31 May 2014) and the Indonesian presidential election (mid-2014).
In the US a recent Gallup poll reveals that a decade low percentage (52%) of Americans are invested in the stock market. And strategists at Wall Street advocate an average allocation in equities of 52.3% – well below the 15-year average of 60.4% – meaning that strategists continue to recommend that investors underweight equities.
In the long term (one to five years), the markets will be 100% driven by changes and their ability to adapt to our new world.
This is the point where I am most optimistic. Asia has its problems, which are mostly growing pains as it is difficult for companies and governments to decide the appropriate growth level without stirring high inflation or causing wide current account deficits.
But Asia is not facing a new Asian financial crisis like in 1998 when many companies and countries were highly geared, bound by quasi-fixed exchange rates and the majority of professionals didn’t have any personal experience from economic downturns or major setbacks.
I believe this bear market will make most emerging markets more ‘antifragile’ to borrow a phrase from Nassim Taleb who believes systems need continuous challenges to improve and become more stable and robust.
Stick with our favourite themes and stocks
We must keep faith in the staying power of the fundamentals, patiently waiting for the impact of the outflows to subside and allowing for what we expect to be a strong rebound in the themes and stocks we like.
With regards to the markets in the Association of Southeast Asian Nations (Asean), foreign investors tend to sell-down these markets every five years or so. At the moment the rolling foreign net buying of Asean is in the red, which can be compared with the peaks of 2%, and the trough of -2% with a ten-year average of between 0.5-1.0%.
On Monday, Thai tourism-related stocks were being indiscriminately sold, hinting investors are getting closer to a capitulation.
I am sticking to my guns and I maintain my bullishness towards particular themes in Asean markets.
I’m certainly looking for the next great story to bring you from that country. And there will be more to follow in the coming months.