Asia may have problems, but it's still a great investment, says Jacob Rees-Mogg.
Joe Studwell's well-argued article in last week's MoneyWeek threw down a gauntlet to all Asian investors. His three bugbears Asia's high saving rate, high growth and, less controversially, poor protection for minority shareholders need to be conquered by those who hope to profit from Asia.
The idea that Asia has a too-high savings rate is most easily challenged by looking at timescales. Morgan Stanley Capital International indices for Asia only started in 1998, so therefore include the crisis of 1997-1999. It is like saying New York did poorly between 1920 and 1935. Of course it did, but that was because it went through a liquidity squeeze of a magnitude seen less than once a generation. The worldwide depression that followed 1929 destroyed corporate earnings and lowered the multiple applied to them. The Dow Jones didn't breach its 1929 high until the 1950s. It's not surprising that Asian markets, over a selective timeframe, have disappointed. Asia handled the devaluations, which led to bad debts and a banking panic, better in the late 1990s than the United States managed to in the late 1920s and early 1930s. Nonetheless, many Asian firms went out of business and survivors had depressed earnings.
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Savings rates in Asia were high before the fall, but the savings were invested in the stockmarket. Investors, who were active in local stockmarkets, lost a great deal and are, not surprisingly, reluctant to return quickly. Now, savings bank accounts are overflowing in Asia, but as the Bible says, "as dog returneth to his vomit so a fool returneth to his folly"; savings will doubtless flow into the stockmarkets again.
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Last week's article also pointed to the lack of welfare provision in most Asian countries. However, a lack of benefits, especially pensions, encourages people to look to the stockmarket for returns particularly in an era of low interest rates. Most developing economies, historically including the UK and the US, had high savings rates when their industrial development began; these deposits were available to fuel investment in industrial expansion. Indeed, even if savings are not invested directly into the stockmarket, they can be lent prudently by banks.
The second argument was that GDP growth was inversely related to stockmarket returns. This has superficial appeal as it is one in the eye for capitalist determinists'. Yet the chart (see above) reveals something different: not an inverse correlation with GDP, but a strong correlation with English-speaking nations. Of the top six in stockmarket performance 1900 to 2004, only one is outside this group and that is Sweden. Australia leads the way, followed by South Africa, the USA, Canada and Britain. It appears that Anglo-Saxon capitalism, the bogey man of the French, is efficient at allocating capital, leading to stockmarket gains. For Asia, this poses the question: which countries are following the path of our old empire?
Hong Kong, the best performer, is still following the capitalist model. Singapore does, Malaysia is moving back to it, and India looks to be heading in that direction. China may follow Hong Kong's lead, while Indonesia and the Philippines are not. That leaves the two biggest Asian emerging markets, by both capitalisation and MSCI weightings, South Korea and Taiwan. Both subscribe officially to Anglo-Saxon capitalist precepts, but neither has yet implemented them convincingly, while corruption and anti-market forces are still rife.
This leaves just one of the article's main arguments: the issue of minority shareholder rights. This is unanswerable. In many emerging markets, minorities are trampled upon. However, the idea of corporate governance is modern. Insider trading was not illegal in England until the 1970s, the Takeover Panel was only established in 1968, while dawn raids were commonplace until the 1990s. It is not regulation that helps so much as information. Because investors know that Korea has chaebols (conglomerates of businesses owned by just one family), it trades at discount p/es to allow for it.
The main reason Asia has underperformed is that high expectations became commonplace. Too many investors chased too few stocks, which, as with the tech bubble, led to over-investment and, in turn, a price collapse. Now valuations are much lower and, gratifyingly, experts are saying you should avoid Asia. This leaves investment opportunities. Wise investors have always been aware that the place to make money is where other people are not looking and the time to do it is when it is out of fashion. As a professional investor in Asia and emerging markets, my job is easier when the standard view is negative; all power to Joe Studwell's elbow.
Jacob Rees-Mogg is a director of Lloyd George Management.
