Evercore Pan Asset

If you bought Japanese equities in 1965 and held them for twenty five years you would have enjoyed the investment ride of your life. The index shot up from 1,260 JPY to 38,900 JPY, a stunning gain of 2,990%. It was difficult to lose money in Japan during the period of supercharged economic growth. If you bought and held over any time period other than the odd year you made money.

Throughout most of the period western investors held little in Japan. There were all sorts of reasons to be sceptical or hostile to Japanese investment. I remember one client of mine in the late 1970s objecting to the idea of Japan owing to his unpleasant wartime experiences. Many said Japan had no ability to innovate or develop new products. They would always be struggling to copy or catch up with the west. Others said Japanese accounting systems were too opaque, or the share ratings were too high. None of this seemed to matter, and gradually as the 1980s and the super boom developed more and more western investors were drawn into owning Japanese shares. 

In 1960 Japanese GDP per head was just 17% of the USA’s. It rose steeply, reaching 40% by 1970, 75% by 1980 and 108% in 1990. China’s GDP per head rose from 2.8% of the US level in 2000 to 4.4% in 2005, and has risen strongly since. In the 25 years from 1965 to 1990 the Japanese economy grew by an astonishing 3200% whilst the USA grew 700%. Living standards were transformed, reaching 99% of US ones. The Japanese economy became the second largest economy in the world. Its success was based on strong export industries, and heavy national saving and investment. Just before the crash in 1990 some were forecasting that Japan, with just 48% of the population of the USA would become the world’s largest economy one day. As the banking and credit bubble subsided, there were believers in the invincibility of the Japanese model.               

Today China could be following a similar path to Japan. A poor country has the work bug. Growth is fast and based on exporting and high levels of national saving and investment. The market has so far risen from 2,500 HKD in 1999 to 18,000 HKD today, giving gains of 620%.  China on some measures is now the world’s second largest economy. Unlike Japan, it is a sensible forecast that China will become the world’s largest economy. With a population 4 times the US China becomes the world’s largest economy when on average she reaches one quarter of US GDP per capita, a not very demanding ask.

Just as there were many doubters about Japan in the 1970s and 1980s, so there are many bears of China today. Some say that China has already reached the peak of her inflationary bubble, and will go into the same kind of meltdown as Japan in 1990. Some say she will not be able to innovate and build big Chinese world brands. Some expect political turbulence to disrupt the economic progress.

I think it possible that China is the new Japan. There are many similar features, though they would not thank me for saying so. I suspect China can manage her banking and credit system through the present bust/boom/bust just as Japan used to in her expansionary days. I suspect the communist regime will keep a grip for a bit longer. Economic success can help keep a country together. China could be the present exciting ride for investors, just as Japan could have been for their parents.