Thursday, July 05, 2012

Asian Equity Markets Have A Lot Of Ground To Make Up

This is a big picture kind of article. If you are working in the financial markets in Asia, rest assured the next 10-20 years will be good, compared to the US and Europe. Back in 80s or even 90s, investing in Asian stocks was deemed so exotic that its like taking an occasional safari trip for European/American fund managers. Despite the boom years for Asian equities in 93-96, many professionals still regarded Asian markets and even Asian economic growth as cyclical and temporary. That view had some truth in it as in decades past, much of Asia was producing primary goods, non-value-added products, churning out low-end cheap products - all of which are susceptible to cyclical effects and not much long term sustainability. 

The situation, particularly after the 97 financial implosion, has seen major developments in many important fronts in Asia. The rise of out-sourcing to China, the rise of middle class consumerism in China. The same pattern being replicated in India albeit 5-8 years behind China. Again, this is a pattern, first China, then India, followed by Vietnam and Cambodia, now certain Eastern European countries and some Latin American countries are main beneficiaries - being a boom boy for "outsourcing" will not last, competing on the ability to manufacture at the lowest cost is not a business model than can be sustained, eventually the manufacturers will find somewhere else every 10 years or so.

Not that its a bad thing, you have to quickly move up the value chain as you cannot compete for too long on cost alone. This again brings back my concerns with Indonesia and Malaysia, we were good in certain areas as low cost producers, we seem to be making little inroads to move up the value chain. Especially Malaysia, look at how we are "hooked" on cheap foreign labour; look at how vociferous the SMEs were at the hint of higher minimum wage, or worse unemployment insurance. All that kind of mentality and lack of political will and business strategic long term planning will only lock us as a low cost producer in many areas.

The excesses of the 90s being wrung out of the financial systems of most Asian economies. South Korea and Taiwan moving up the technology and design curve appreciably. Singapore edging ahead in the war with HK for financial center supremacy. The (minor but significant) steps taken in the eradication of corruption in Asian economies. More importantly, significant steps have been made to finally drag Japan out of the financial doldrums with important changes particularly with respect to abolishing cross-holdings, restructuring postal savings scheme, opening up of Japanese companies to foreign interest, and a renewed penchant for corporate restructuring. All these are important moves to further push Asian equities to the fore.

All that is happening with the consumer base of two of the largest populated markets in the world (India and China). Hence to view Asian equities as cyclical would be dangerously foolish and uninformed. If you want to talk of the rise of the middle class globally, nowhere is that more apparent than in Asia, China and India in particular. The rise of middle class is actually highly significant to the consumer base. People who used to toil the land for a living now will be able to buy electrical products, cars, etc... as they move up the consumer chain. Hence companies than feed on that hunger will propser, especially Asian companies closer to the source.

Asia is still a place where we can produce manufactured goods for export cheaply, but is quickly moving up the value-added ladder. Of course I am not lumping all Asian countries, more so China and South Korea. More importantly, Asia is now a crucial market place for commodities, consumer goods and to a lesser extent services. Less appreciated is the fact that Asia is quickly becoming a hub for advanced R&D (research and development), as well as design, production, and test-marketing of higher-end products such as automobiles, consumer electronics and a range of technological applications and services. Asian governments are supporting these trends by investing in education and infrastructure, offering favorable tax and regulatory treatment, and reducing tariffs and other barriers. These measures, as well as Asia's underlying attractiveness, are helping to facilitate record numbers of cross-border transactions as well as rising trade and investment flows into the region. Plus after the 97 implosion, Asian countries are a lot friendlier to one another, and there is renewed need for more cross-border trade, cooperation and inter-dependency among Asian countries.

Before this becomes another useless economics paper, my main point is that back in 2003, Asia accounted for only 11% of the total global equity market capitalisation. Currently, Asia accounts for slightly more than 20% of total global GDP. Asia could very well rise to the 30% figure (of global GDP) within the next 10 years. The jump over these few years will be bigger thanks to the debt crisis enveloping the US and Europe which will still have a few years to play itself out. Bearing in mind also that Asian bourses have a much higher percentage of its GDP that is listed compared to the rest of the world, so the 11% figure is more skewed. All said, more and more professionals recognise these important trends in Asia. Even if Asian equity markets were to gain just 10% a year from here on, it would take at least 10 years before Asian equity markets reaches anywhere near parity with its share of GDP production and consumption patterns. Here's to a good 10 years for Asia... at least!

All this also comes at a time when the US and Europe are still grappling with  the aftermath of an enormous financial-debt bubble bursting. Is it any wonder that the more attractive IPOs over the last 2 years have been in Asia? Is it any wonder that many of the global brands have chosen HK or Singapore to list their companies - cause thats where the "new financial capital" is, when there is money swishing around, you get assured demand, better valuations.

Added to the mix of the rise of Asian sovereign wealth funds and country specific pension funds - they are more aggressive, their size have grown too big to just invest locally. To that end, they continue to fuel the demand for "instruments" in Asia to spread their investments. 

Having said all that, its not all rosy, we still find it extremely difficult to groom global brand names or have strong Asian companies that can compete internationally. Is there an Asian Apple? Yes we have Samsung but thats about it. If we talk in terms of creating great new businesses, Asians fails miserably. We are good at copying something, or doing something generic really well. As good as Charoen Pokhphan and Robert Kuok are, they did not create new businesses, they replicated and are good businessmen who understood the key is to be number one or two in whatever industry they are in. Will we ever have an Asian type Facebook company?

Much of the corporate activity and grand listings from Asia or China in particular, have been companies imitating what has been invented in the US --- you get your Asian Google, Asian You Tube, etc... we are mostly plug and play companies (i.e. buy a software from the States and plug it in asia, change the language). If you are in China, you almost had it made with the critical mass of consumers.

Imagine me in a country of 300m people and they all only know one language, say Swatonese (a mix of Swahili and Cantonese), imagine again if I am the only guy who brought over Google search, You Tube and Facebook to that country, you can bet I will be successful. Good business yes, but no creativity or inventiveness. Creativity and inventiveness are crucial because to create something new gives you way more leverage in long term value creation, it creates a lot of patents, royalties ... you reap sustained easy income and immeasurable benefits. In that sense Asia has a long way to go. Asian equity markets will be highly attractive as more and more countries list their private entities. But if we continue to fail to create global brands or new exciting big companies from scratch, we are still serving our "financial and economic masters" somewhere.


bruno said...

Lets go back to history again.The Nikkei was 30k at its all time high.Two decades over later today it is not even 1/3 its peak value.

Once upon a time the greenback was king.These last decades or so have seen the dollar fall out of bed.Many currencies have hit all time highs against the greenback these last few years or so.

First the AFC.Now it is the EFC yet to hit full speed.When it finally hit top speed,many experts are predicting a severe recession.

But very few people are looking at deflation.Look at Japan.It is stuck in an empty vacuum for the last twenty something years.This time around if deflation hits the world,or even the US alone,the greenback will soar and the rest of the currencies will bite dust.

Than,the greenback will be king again.Forget the debt of the US.It may be the world's biggest debtor.But it will be the most sought currency again.The US dollar has gone the world around and finally come home to roost.A full cycle coming home of the greenback.Than bluechips can be had for fifty cents or a buck.

farulg said...

Brilliantly written, particularly the last part about creativity and innovative entrepreneurship. Partly because I believe the Asian culture still stigmatizes failure so people are less willing to be creative and try something completely different. Those that are willing unfortunately will do so in the US or Europe.

farulg said...

Brilliantly written, particularly the last part about creativity and innovative entrepreneurship. Partly because I believe the Asian culture still stigmatizes failure so people are less willing to be creative and try something completely different. Those that are willing unfortunately will do so in the US or Europe.

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Excellent content. Asian finance market definitely boost up their economy structure.
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zen cat said...

Not possible to have the sort of cutting edge innovation given the social mindset in Asia.

Just imagine if a 20 year old Asian kid told mum & dad he was dropping out of Harvard to build a "start-up" (as Bill Gates & Mark Zuckerberg did when starting MS & FB) or just drop out & bum around for a while before getting inspiration to create Apple as per Steve Jobs?

I know what my parents would have screamed: Stop dreaming! Finish your f***ing degree & get a real job!

You need a thousand, ten thousand, a hundred thousand Bill Gates/Steve Jobs/Mark Zuckerburgs to try & fail before 1 succeeds, how many Asian kids or rather parents will allow them to even make such an attempt. Imagine the shame, friends & family gossiping that so & so's son/daughter dropped out of college!!!

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