Asia & Emerging Markets Commentary

November 10, 2009 4:25 pm

Carl Delfeld

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor . He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor . Click here for more analysis from Delfeld, or to subscribe to Chartwell Advisor. click here.

The biggest threat for U.S. multinationals is not existing competitors,” says Vijay Govindarajan, professor at Dartmouth’s Tuck School of Business and chief innovation consultant to GE. “It is going to be emerging-market competitors.”

Nouriel Roubini is one arguing that we are building a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – and an even bigger rally in emerging market asset classes. At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs.

But while it appears that the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is losing ground. I agree with Roubini that risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

Singapore’s (EWS) trend rate of economic growth is likely to slow because of labor constraints and its success in achieving high levels of income per head, according to Tharman Shanmugaratnam, the island state’s finance minister.

“I think it is reasonable to assume that growth going forward over the next five to 10 years will be somewhat lower than growth in the past,” Mr. Tharman told the Financial Times in an interview. Singapore’s gross domestic product per head at current prices is $34,346 according to the IMF – just behind the UK on $35,727 and ahead of some advanced countries, such as New Zealand on $26,932.

Andy Xie makes a good point about China’s (TAO) developing real estate bubble. Xie points out that Chinese cities may need an additional 8.4 billion square meters of space. China’s works-in-progress covers more than 2 billion square meters…The construction industry has production capacity of about 1.5 billion square meters per annum. Absolute oversupply - not enough people for all the buildings - could happen quite soon.

Japan’s (EWJ) central bank is taking a step towards phasing out emergency measures aimed at tackling the impact of the financial crisis, saying it would stop buying ­corporate bonds and commercial paper at the end of the year. However, in a sign that it remains cautious, it extended a program to provide limitless lending to help corporate financing until the end of the fiscal year, next March.

Rising Chinese demand helped drive South Korea’s (EWY) economy to its fastest growth in seven years in the third quarter, highlighting how Asia might be able to lead the global economy and trade out of the global downturn.

The Asia-Pacific region’s fifth-largest economy grew 2.9 per cent from the previous quarter as South Korean exporters benefited from rising Chinese demand. Last week, China said its economy reportedly grew 8.9 per cent in the third quarter from a year ago. Can we believe the numbers out of Beijing though?

On trailing earnings, while the S&P is at a multiple of 23 times, Shanghai is at 32 times and South Korea at 35 times.

We have a focus article on Chile CH, ECH) later in this issue but as head of Chile’s right-wing coalition, Mr. Piñera is enjoying a comfortable lead in the run-up to national elections in December. Chileans are showing some appetite for change and Mr. Piñera appears to be offering just the right amount.

“Our objective is to maintain the network of social protection that has been constructed by the last governments … but to make it more efficient,” he tells the Financial Times in the back of his official car. “Efficiency” is the watchword for this entrepreneur turned politician. There will be no messing with the policies that investors have come to love about Chile: balanced budgets, open markets, stable institutions and respect for the rule of law.

Higher taxes in Mexico (EWW) as it passed a 2010 budget on Wednesday that increases value-added tax for the first time in more than a decade as the government attempts to reduce its dependence on oil revenues. The VAT will go from 15 to 16 per cent and income tax for top earners will go from 28 to 30 percent.
India’s market has cooled a bit amidst its tightening of raids and high valuations. There are three India-focused exchange-traded products on the market. The PowerShares India (PIN) ETF and the iPath MSCI India Index ETN (INP) both focus on large-cap companies. They have tallied returns year-to-date of 71.6% and 90.6%, respectively, according to Morningstar. The WisdomTree India Earnings Fund (EPI) dedicates nearly 20% of its portfolio to mid-caps, with the remainder being primarily large- and giant-cap offerings. The fund had posted year-to-date returns of some 88.2% before the recent pullback.

Chile (CH, ECH) has been a top performer and the “Star of Latin America” has weathered the global financial crisis much better than most countries. Why, market reform and smart management. President Michelle Bachelet, a pediatrician, will step down early next year after serving only one term - the limit in this wary political system.

But with only five months until she leaves office, Ms. Bachelet is increasingly likely to be remembered as one of her country’s most popular leaders. Polls show her public approval to be more than 70%, and in recent weeks she has recorded the highest levels since Chile went from dictatorship to democracy in 1990.

Investors have rewarded her conservative policies especially her wise move to salt away 35 billion dollars in revenues from copper sales during the last commodity boom. That aggressive saving and $20 billion of investments gave the country money to spend on pension reform and Ms. Bachelet’s ambitious program of social protections for women and children. For example, it tripled the number of free early child-care centers for low-income families. It added a minimum pension guarantee for the very poor and for low-income homemakers.

Chile’s economy may grow by 5 percent next year.

Ms. Bachelet personal story is powerful. Her father, an air force general, was tortured for months under the dictatorship of General Augusto Pinochet and died in prison. Military officials also detained and tortured her and her mother before they were allowed to go into exile in Australia return to Chile only in 1979.

Turning to Turkey, (TUR) is up 78% this year as investors are attracted to a country looking to join the European Union. But is this large, secular Muslim country with a GDP ranked 16th in the world turning East instead of West?

Many is Washington and Brussels are questioning Turkey’s dependability as an ally, and many Turks are asking whether they should reject the European Union before the bloc rejects them.

What has changed the perception that Turkey, the 16th largest economy in the world and the heavyweight in the Middle East, has changed its stripes? It canceled air force exercises with Israel, made overtures to Iran and publicly supported its nuclear ambitions, and seemingly has given up on EU membership.

Last week, during a visit to Tehran, Mr. Erdogan said the West was applying a double standard in pressuring Iran over its nuclear program. “Those who are chanting for global nuclear disarmament should first start in their own countries,” he said.

Mr. Ersin Kalaycioglu, a political science professor at Sabanci University, notes that leaders of the governing Justice and Development Party, or A.K.P. may well be more at home in Riyadh, Damascus and Baghdad than in Paris, London or Rome.

Turkey is a very important country and ally for multiple reasons. Bordered by Iran, Iraq and Syria, Turkey is a powerful symbol of the compatibility of democracy, capitalism and Islam. As a link between the Middle East and the former Soviet Union, it has vital strategic importance as a transit country for gas. It also has deep influence in Afghanistan and is a regional leader in the Caucasus.

As Turkey seems to incrementally resign itself that EU membership is unlikely, it will also move closer to Russia, at the very least as a point of leverage in dealing with the West.

Fed by low rates, ample liquidity and stronger economic growth, property prices have soared this year in Hong Kong (EWH) and across the Asian region.

Earlier this month, a Hong Kong luxury apartment sold by the developer Henderson Land grabbed headlines when it sold for $55.6 million, at a price per square foot that had never before been seen in a city renowned for some of the world’s most expensive housing.

But over the past few weeks, regulators across the region have begun to announce small steps to try to prevent a bubble from growing unmanageable. Last Friday, for instance, regulators in Hong Kong raised the down payment required for homes costing more than 20 million Hong Kong dollars, or $2.6 million. In South Korea, the financial regulator plans to tighten regulations on nonbanking finance companies’ lending to households.

So far this year, residential prices in Singapore are up 15.9 percent, according to analysts at Macquarie. In Hong Kong, they are up 23 percent, and back at their March 2008 peak. Residential prices in most Chinese cities are at least 15 to 25 percent above the lows of a year ago, Macquarie estimates.

The exception is Japan, whose economy is still mired in a no growth mode for much of the past two decades. Urban land prices in Tokyo, for example, fell 8 percent in the second quarter of this year from the previous quarter, according to data compiled by Global Property Guide.

Another driver of prices is that Western capital is flowing to Asia in search of better returns not only in real estate but share prices as well.

Macquarie’s view is that much of the property market growth one would have normally expected to see in 2010 has simply been brought forward into 2009 — leaving less room for prices to rally as much next year.

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