By Jonathan Anderson, head of Asia-Pacific Economics for UBS
(Caijing Magazine) Let's start with a fundamental point: The emerging world as a whole has been a very good place to invest over the past decade. The chart below shows the average path of stock markets (in U.S. dollar terms) in all regions since 1990.
As you can see, since January
2000, an investment in almost any emerging destination did much better than a
similar bet on a U.S., European or Japanese market.
Among the regions, the star performer was Latin America, followed by EMEA (Emerging Europe/Middle East/Africa) and emerging Asia (China, India, Indonesia, Malaysia, Philippines and Thailand). In last place, far behind the rest, were the four Asian Tiger economies: Hong Kong, Singapore, South Korea and Taiwan.
If you invested in a tiger market, you not only significantly underperformed emerging regions, but you actually did no better than you would have in advanced economies. Why? Asia has been the most dynamic part of the world over the past 10 years, and the four tigers have grown rapidly along with their neighbors and global trade. So what's their problem?
We need to take a closer look here. As it turns out, the single best predictor of stock market performance in EM countries over the past few decades – that is, not just since 2000 but really since the early 1980s – has been nominal GDP growth in U.S. dollar terms. This variable itself explains perhaps 70 percent of market performance, while 30 percent comes from changes in valuations and relative earnings. This variable is highly correlated with nominal growth. So being able to grow in nominal terms obviously matters -- a lot.
This brings us to the second
chart, which shows the average annual U.S. dollar GDP growth rate in each region
between 2002 and '07, better known as the boom years. The dark bars in the chart
indicate real GDP growth, while the lighter bars show the "additional"
contribution of nominal growth converted into dollars.
Indeed, an underlying factor is that the tigers are boring, staid and developed. Hong Kong and Singapore have per capita income levels somewhere in the middle of the OECD range. Taiwan and South Korea fall somewhat lower in the income range but are still structurally and demographically mature economies with higher levels of credit and debt penetration, more or less full financial maturity, and solidly middle class lifestyles. So there's no catch-up here anymore, and no chance for big, relative economic gains coming through the pipeline. Compare this with recent performances in China, India or Indonesia, which are rapidly gaining ground on U.S. income levels from their current low bases.
Now, a skeptic will point out that being in boring and staid markets is a good idea when markets are turning down rather than up. That's true. The tigers indeed fell less than their emerging neighbors when the global crisis hit in the second half 2008. However, this relative glow didn't last long: Most of those relative performance gains were erased in the ensuing upturn this year. In fact, if we measure the cycle over the past 18 months, we find Hong Kong, Singapore, Taiwan and South Korea actually ranked in the middle of the pack in U.S. dollar returns.
And this brings us to the most important point: We are looking for another bout of strong, emerging growth and strong, emerging markets over the next five years. It won't be quite a repeat of what we saw over the past half-decade, of course, since the impact of a weak U.S. and European economies means everyone will have to grow more slowly. But it could be equally impressive in relative terms. Why? Because EM countries have stronger balance sheets, and we have never seen a bigger gap in underlying macroeconomic conditions between the developed and emerging worlds.
So again, while everyone will grow more slowly than in previous boom days, we still see a story of relative over-performance in the emerging world, with plenty of support for EM currencies, plenty of room for continued commodity upside, and plenty of reasons to worry about the U.S. dollar in particular.
If this is the case, the four
tigers will likely be left behind once again. As before, they don't have much in
the way of structural inflationary pressure at home; their currencies are more
closely tied to the dollar than those in EM regions, and they don't stand to
benefit from a world in which commodity prices continue rising. We should stress
that this doesn't mean their economies are weak – far from it. But it does mean
their economies are mature. And in the coming global environment, maturity is
not necessarily a plus.
Full article in Chinese: http://magazine.caijing.com.cn/2009-11-08/110307047.html