Worlds apart
October 12th, 2010
Whilst China and India wrestle with overheating, high inflation, and rapid growth, the west and Japan continue to fret about double dips, slow growth and anaemic money supply and credit. The contrast between the two worlds is also stark so far this year if you look at the performance of the various stock markets.
Casting my eyes over typical Exchange Traded Fund prices that reflect the main indices, I see US, UK, Japanese and world shares have earned returns of between zero and 4% since January 1st. The ETF that tracks hedge funds has also produced a zero return so far. On the other side of the world India has offered a stunning 22%, Asia ex Japan 10% and emerging markets generally 9%. This need not be such a surprise. Many of the emerging market economies are now pushing ahead of the levels they reached in 2007, at the same time as the west is struggling to recoup their heavy losses from 2007-9. Economic growth does help the growth of company earnings and dividends. Large western portfolios have had too much in western shares and too little in emerging market shares. As they try to balance up their funds, so the prices move as you would expect. China has lagged, as investors have worried about how severe the slowdown will be as they watch the authorities reining in property prices and bank loans.
Sterling corporate bonds have come in with a reliable 5% return since January, and still offer convincing yields to new buyers. Top of the leader boards in the ETF tournament are gold and US property, producing 20% and 17% this year to date. Gold reflects the small world supply, the growing demand for all things that glitter in Asia, speculative demand and the possibility of Central banking buying of gold for reserves. US property reflects the very low valuations reached in the depth of the Credit Crunch, and the better yields than on mainstream shares. At the other end of the spectrum there are unpleasant losses on clean energy and oil.
There are still plenty of bears around talking down Asia. They worry about Chinese banks, the reputational impact on India of the Commonwealth Games, the substantial inflation in places, and the vulnerability of export led emerging economies to any further weakness in the west. Critics are right that some of the emerging market countries do not have democratic or ideal governments, are not fully wedded to transparent and open markets, and are still well below western levels of income. It would be wrong, however, on anything other than a short term or tactical view to write off or underplay the achievements of many of these rising economies.
Two central truths remain. The first is their share of world income and world output is growing, will continue to grow and will become increasingly important to the world economy. The second is their smaller and imperfect Stock markets are likely to expand with their economies. The investors in the west remain under represented in the fastest growing parts of the world. A lot of the magic of equity investment is about growth. Investors should remember how wrong the critics of Japan were in the 1960s and 1970s, when they underestimated Japan’s capacity for hard work and better management to reach western levels of income. Some western countries will find repaying their debt overhang difficult and time consuming. Some seem unaware of the strength of the competitive threat to them from hard working emerging market areas.
This year I have been recommending balanced portfolios, with a mixture of corporate bonds, property REITs and shares with the strong emphasis on emerging market equity. It has worked so far, and still seems to reflect the general conditions. It also means I keep asking myself more insistently, what could go wrong? It means I need to watch out for any signs of a new world slump, or of a shift in the relative growth patterns that currently split the world.
As published in Investment Week
