It’s different every time
Posted on 21 February 2014
However, there was a background uncertainty that I hadn't sensed for a while.
Taking part in our Asia investment roadshow this week was as welcome a tonic as ever for a seasonally damp European analyst accustomed to economies moving at the pace of a (very) slow loris.
True to form, there were large buildings – if not islands – that weren’t there last time in Hong Kong; the plane windows filled with ships at anchor as we approached Singapore (plane-to-taxi via immigration at Changi was a new personal best of barely 10 minutes); the traffic in Jakarta was intimidating.
However, there was a background uncertainty that I hadn’t sensed for a while. The region mostly had a “good” 2008/9 of course, its economies and markets shrugging off the initial setback relatively quickly, powered locally by China’s economic exuberance and by cheap dollar liquidity. But more recently China has slowed, emerging markets generally have been underperforming since 2010 and the Fed is now scaling back its bond purchases.
And history is rhyming quite loudly at present: exactly 20 years ago the emerging world was about to be buffeted by the tequila crisis inspired by US monetary normalization, an event that eventually rolled into the traumatic Asian crisis of 1997 – trauma that erupted in Thailand, and which had an impact even on the developed markets in the region (which of course include Hong Kong and Singapore).
These historical echoes are resonating in the local media, and our client meetings and events were perhaps a little quieter than usual. Our reluctance to turn more positive tactically on emerging stocks, for example, and our citing of the dollar and sterling as our two favourite big currencies, met with less questioning than those calls usually would.
The softer data from China during the week underscored this relative lack of confidence – even as investors seemed happy to give the weather-related benefit of the doubt to even weaker numbers out of the US. My co-host at a cable TV discussion compared India’s political gridlock – there are important elections ahead, as there are in several other key Asian economies, including Indonesia – with that in Italy (this week’s changing of administration in Rome notwithstanding).
Perhaps the more cautious mood is itself a reflection of the striking improvements in living standards achieved to date – and/or an awareness that rapid growth is not without its costs. Pollution – whether from coal-fired energy generation (mainland China and Hong Kong) or deforestation (Indonesia and Singapore) is a bigger concern than ever. More generally, I was struck by a recent GK Dragonomics essay describing the excess supply of university graduates in China resulting from a lowering of admission standards, and the impact this is having on perceived unfairness. Doubts about Asia’s routine dominance in education have already been fuelled by the increasing resistance to the pressure-cooker approach typified by South Korea’s hagwons, for example.
In terms of the immediate outlook, we believe Asia’s economies are in much better shape than in 1997. Unfortunately, markets are often driven by emotion and contagion. And we all know that the most dangerous words in investing are “It’s different this time”. But we do think Asia can avoid another local crisis.
Longer-term, it remains our favourite emerging region by virtue of its diversification, governance and balance sheets. And while regular readers will know that we enjoy drawing historical parallels ourselves, including some of those with the mid-1990s, you shouldn’t push them too far. Remember that context and perspective are hugely important in investing – and at some level they are not different this time, but every time.
Kevin Gardiner, Chief Investment Officer, Europe