Showing posts with label BRIC. Show all posts
Showing posts with label BRIC. Show all posts

Friday, April 02, 2010

Global Stock Market Update: Clearly A Bull Market Rotation

This is a fantastic update from Bespoke Invest on the performances of global equity markets for the first quarter.
From Bespoke, (all bold highlights mine)

``The average year-to-date performance of the 81 countries listed below is 6.94%. With a YTD gain of 5.27%, the US is just below average. Only 12 of the countries shown are down so far in 2010. Three Eastern European countries are leading the way this year with the biggest gains -- Ukraine (58.87%), Estonia (41.36%), and Romania (29.89%). Bermuda is down the most with a YTD decline of 31.39%.

``Looking at just the G-7 countries, Japan is up the most so far in 2010 with a gain of 6.62%. Japan is followed closely by Britain (+6.13%). The US ranks third out of G-7 countries, while Italy has been the worst of the group with a decline of 0.18%. Of the BRIC countries, only Russia is doing better than the US in 2010. Brazil, India, and China have all underperformed the US. China is one of the 12 countries that is down."

Additional comments:

1. Data and commentary above describes only the current conditions. This means they exclude prior actions which has significant influences in shaping the present state of the markets. Such exclusions thereby distorts the overall perspective or does not give a good representation of the big picture.

2. Bull market in global stocks is clearly undergoing a rotation. Former laggards ('crisis' affllicted nations) are now mostly in the higher echelon, while former leaders are now in reprieve or among the "median" or mediocre gainers.

3. While BRICs have lagged G7 nations, the differences have been marginal. In contrast the BRICs lead G7 by a mile in 2009. However this appears to be changing, as BRIC seem to be regaining momentum. We can expect the BRIC to close this gap or go ahead by the next quarter.

4. Different folks, different strokes.

China's underperformance has been more due to government's applied strong arm tactics on the markets to contain bubbles. Ergo, government intervention has prompted for China's lag.

In contrast, OECD or G7 nations have governments providing continued support to their markets (QE). In short, China is somewhat applying actual tightening measures while G7 nations are relegated to rhetorical actions. Obviously, the divergence of policy actions has resulted to this short term variance.

5. Philippines, despite its recent breakout, remains in the lower ranks and importantly trails her closest neighbors (Indonesia, Thailand and Malaysia). This implies more room for an uptrend.

6. Venezuela, which suffers from increased socialism, as measured in increased inflation (devaluation of Bolivar), remains on the upside. My point: high inflation does not necessarily mean lower markets, this depends on the state of the inflation cycle.

7. Contra Keynesians and Fisherians: Where is deflation??!!


Saturday, January 23, 2010

Scorecard From This Week's Global Equity Bloodbath

This chart from Bespoke presents a good coverage of this week's resurgent volatility. According to Bespoke,

``As shown, both the G-7 and BRIC countries sit at the top of the list of worst performers. The countries that have held up better are located mainly in the Middle East, Africa, and Eastern Europe.

``Combining the BRICs and the G-7, Russia has done the worst since Tuesday with a decline of 6.33%. But Brazil and the US are not far behind with declines of more than 5%. Italy, France, and Germany are all down around 4.75%, followed by Britain at -3.81%. There has been lots of talk about China partly at fault for the global sell-off, but the country itself is down just 3.64% since 1/19. Japan has by far done the best of the G-7 and BRIC countries over the last three days with a decline of just 1.62%."

While it is true that BRICs got equally hit as hard as the G-7, the picture isn't complete. In any comparison, points of references are important because they can tilt balance of presentation.

Remember, in 2009 the BRICs outperformed the G-7 by a wide wide wide margin hence it should be natural for them to bear the brunt of the recent carnage.

However, last week's selloff reveals that the damage hasn't been significantly different. And if the current correlation continue, one can expect the BRICs to materially outperform its G-7 counterparts anew.

Although as seen from a year to date (or on a 3-week) basis on the left column, the BRICs have marginally underperformed the G-7, however 3 weeks is too early to call.

Nevertheless the overall market conditions should give us some clues.

As mentioned by Bespoke some markets in former crisis plagued Eastern Europe and the Middle East have outperformed.

For instance, Estonia was up 7% on a week on week basis but is up 30% (!!!) on a year to date basis and so with her peers (also based on year to date) Latvia 15.04%, Lithuania 11.29%, Romania 7.2% and Ukraine 7.08 as well as Malta 13.27, Kenya 11.73%, Egypt 9.76% and so forth...

While everyone's focus (as indicated by Bespoke's article) has been on how the key markets got hammered (BRICs and G-7), what may have been ignored by the rest is how the broad periphery (emerging markets) had been vastly unfazed by the ruckus.

This for us, implies two significant messages:

First, that the periphery signifies delayed or belated reaction from the still to be felt ripples or

Second, that many emerging markets will likely show signs of meaningful divergences (decoupling), which could mark the theme for 2010.

And if it is the latter scenario, then this week's meltdown could be suggestive of a bear market trap.

Wednesday, January 20, 2010

Graphic: BRIC Versus G7

This is graphic is a comparative from the Financial Times between major emerging economies coined as the BRIC (Brazil, Russia, India and China) relative to G7 economies.

The chart highlights both the positive and the negative aspects of the BRICs.

Nonetheless I find this an apples and oranges comparison, therefore impertinent (which is why one should be cautious with the mainstream).

The advantage of the BRICs on the left corner is predicated on the projections of future performances: growth contributions, share of the economy and growth rate.

Whereas the right corner accounts for as the disadvantages of the BRICs which reflects on the present conditions (lower per capita GDP and weak private consumption).

The comparative graphic should have shown projections on similar time dimensions, unless the FT assumes that while BRIC outperforms in growth, per capita and private consumption remains static?!

Thursday, October 01, 2009

BRIC Horse Race: Russia Leads, China Trails

Bespoke Invest shows of the relative (horse racing) performances of BRIC countries.

According to Bespoke, ``After leading the BRIC countries (Brazil, Russia, India, China) in year-to-date performance by a wide margin a few months ago, China is now doing the worst... Russia's stock market is now doing the best in '09 with a gain of nearly 100% (98.5%). India is up the second most at 77.5%, followed by Brazil at 62.4%, and finally China at 52.6%. And while the other three BRIC countries remain in nice uptrends, China looks quite the opposite."

It would appear that Bespoke likes to "pick" on China for unknown reasons.

Nonetheless, we would like to add that Russia's RTSI earlier fell almost 30% from its MAY 2009 high prior to this recent outperformance. So the May decline served as a "bear trap" for any BRIC skeptics.

And considering the still loose monetary environment, China's market via the Shanghai index could replicate Russia's performance.


Ticker tape reading today's activities into the future isn't guaranteed.

Friday, August 14, 2009

Mark Mobius: Expect Market Volatility, But Capitalize On The Opportunity

From Franklin Templeton's July Emerging Markets Review

Feature of the Month: Q&A on Emerging Markets with Mark Mobius, Executive Chairman, Templeton Asset Management Ltd. (red highlights mine)

Is the recent rally in emerging market equities sustainable?

Although we are optimistic about the markets’ upside potential, it is important to realize that volatility is still with us and will be with us for a while. This means that there will be down markets as well as up markets. We therefore must pay attention to valuations and long-term earnings growth prospects in order to avoid buying or holding expensive stocks as a result of dramatic price rises that we have seen. Current valuations are below the five-year high valuations and thus are not excessive.

Emerging market equity funds resumed net inflows, recording a record $26.5 billion of investment in the 2nd quarter. Do you think emerging markets will continue to attract inflows?

In general, we expect inflows to continue, however, there could also be some volatility. We cannot expect to see net inflows every month or every week, but in general the trend should be positive. In the first seven months of 2009, net inflows (using weekly data from www.emergingportfolio.com) totaled US$34.5 billion. This is more than 85% of the approximate US$40 billion in outflows in 2008.

What are the reasons?

A return of confidence in emerging markets, the desire for higher returns, an increase in investor risk appetite, the search for undervalued companies and most importantly, attractive valuations in emerging market companies drove the inflows.

Within the emerging markets universe, where do you see the most attractive opportunities at this juncture?

Since it’s usually possible to find at least a few bargains in most markets, all emerging market regions are looking exciting. Currently, our largest exposures are to Brazil, Russia, China, India and South Africa. In terms of sectors, commodity stocks also look good because some of them have declined significantly below their intrinsic worth and we expect the global demand for commodities to continue its long-term growth. Consumer stocks are also favored. With rising per capita income and strong demand for consumer and other goods, the earnings growth outlook for these stocks is positive.

The World Bank recently said that reduced capital inflows from exports, remittances and foreign direct investment means “increasingly grave economic prospects” for developing nations. Do you share the view and is it something to worry about?

The World Bank is normally "behind the curve" when it comes to economic projections. Economists tend to look through the rear view mirror and not ahead. While reduced capital inflows from exports, remittances and foreign direct investment could have a negative impact on emerging markets, we can expect to see increased inflows resulting from consumer and infrastructure spending growth compensate for this. This could allow markets to record positive economic growth. This is especially the case in markets such as China and India.

Are you still optimistic about Asia ex-Japan? Which markets are you most positive about?

Yes, Asia is the largest emerging market region in the world. Asian countries are also growing relatively fast. They include countries like China and India with very large populations whose per capita income is growing, and capital markets in those countries are undergoing rapid development. Economic growth remains relatively high, per capita incomes have been rising, valuations remain attractive and reforms continue, thus improving the region’s business and investment environment. Our largest exposures are to China, India, South Korea and Thailand.

What are your views on the BRICs bloc? Is it a good investment proposition?

Yes, we remain optimistic about the long-term future of the BRIC markets. The BRIC countries are among the fastest growing economies in the world. Moreover, foreign exchange reserves in all four countries remain high. The four markets together account for more than 40% of the world population. Domestic demand growth also remains robust. China and India continue to register significant positive GDP growth rates in spite of the global slowdown China continues to take great strides towards becoming a major global player. The Chinese economy is expected to grow about 8% in 2009 and its foreign reserves have surpassed US$2 trillion. Moreover, Brazil and Russia are resource rich countries and although commodity prices have declined from their peak, the longer trend for commodity prices is up and these countries will benefit from global demand for oil, steel, aluminum, pulp, and other commodities.

Commodity prices have rebounded strongly and this has augured well for emerging markets. What are your views on commodities going forward?

The outlook for commodities remains positive. Strong demand from emerging markets coupled a more inelastic supply could lead to higher prices in the future. In general, we expect commodity prices to maintain a long-term uptrend. However, this will not be without corrections along the way. A number of emerging markets are major suppliers of various commodities as well as big consumers. For example, Brazil is one of the world's largest suppliers of iron ore, Russia is the largest supplier of natural gas, and so forth. Also, since emerging markets have the most people in the world the potential demand for commodities in those countries is also great. It is no surprise therefore that interest in such commodities is important..

I'd like to add that Dr. Mobius recently reemphasized the volatility factor.

According to Bloomberg (bold highlights mine), “When you have these rapid increases, almost without correction, you will definitely have a correction at some point, so we can expect a lot of volatility,” Mobius, the executive chairman of Templeton Asset Management Ltd., said in an interview in Kuala Lumpur today. “Increases of 70 percent can be followed by decreases of 20 to 30 percent.”

The so-called correction “can happen anytime, probably this year,” Mobius said. “It may not be all at once, you may not see a decrease of 20 percent suddenly, it could be 10 percent here, and a rise of 5 percent then another 10 percent, you’ll see this kind of volatility in the markets.” He added that he was referring to shares “globally.”

Nonetheless he would use the correction to add positions...

Again from Bloomberg, ``The biggest risk for global stocks is the increase in initial share sales and bond issues, Mobius said today. Investors will be “selling to take up new stocks, that will impact the prices,” he said. Mobius, who oversees about $25 billion, on July 29 said he plans to double Templeton Asset Management’s emerging-market assets within two years."

Since he doesn't think its a bubble...

Again from Bloomberg, “I don’t think it’s a bubble” because “you don’t have the irrational exuberance so to speak that you would normally find in a bubble activity,” Mobius said. The government’s policies to rein in bank lending are a “good thing,” he said.

Tuesday, July 28, 2009

Global Stock Market Performance Update: Proof of Rotational Effects and Tight Correlations

This is an example of how experts use specific time frames to prove a point.

This from Bespoke Invest,

(bold highlights mine)

``The S&P 500 is up 11.24% since July 10th, which is a significant move in such a short period of time. The recent gains also put the index up nicely at 8.28% year to date. As shown below, the US has performed well relative to the rest of the world. Since July 10th, it ranks 22nd out of 82 countries. Russia is up the most with a gain of 24.23%, followed by Hungary, Poland, Norway, Romania, and Germany. Middle and Eastern European countries have seen some of the biggest gains in recent weeks."

Justify FullAdds Bespoke, ``While China has been the second best performing country (behind Peru) year to date, it is only up 10.32% since July 10th. This is better than most countries, but it hasn't been the worldwide leader that it was earlier in the year. Five of the G-7 countries have outperformed China, and all seven G-7 countries are in the top 50% in terms of performance. This is a sign that developed markets have been holding their own against emerging markets in recent weeks. Only ten out of 82 countries are down since July 10th, with Slovakia leading the way at -5.67%."

We are grateful to Bespoke for their wonderful graphics.

However, with China's year to date gains at a mindboggling 88.66% and with the Shanghai benchmark at grossly overbought conditions, it would be a puzzle or an irony to expect a continuation of such torrid pace of advances or even make a worthwhile comparison. 88% versus 9% (year-to-date) is just a wide wide chasm.

As we earlier wrote in Global Stock Market Performance Update: Rotational Effects and Tight Correlations

``If global markets have been driven by liquidity or monetary forces or inflation dynamics then it is quite obvious that there will be rotational effects and secondly, for the early movers some tight correlation, as global liquidity transmission interlinks divergent markets."

Hence, our views seem to get validated where we appear to be indeed witnessing rotational effects from inflationary policies as the market leadership has temporarily switched from (leaders) emerging markets to the (laggards) developing markets.

Another, as Bespoke likewise observed, only 10 out of 82 since July 10th are down, or 17 out of 82 global benchmarks on a year-to-date basis-signifies further proof of the "global liquidity transmission interlinks divergent markets", we earlier posited. Market gains seem to broadening on a worldwide basis, but not all.

Russia's RTS outperformance appear to be a function of a typical bullmarket trend.

As we commented in the same article, ``Russia's hefty decline exhibits overheating. The Russian benchmark is still the 5th best year to date performer IN SPITE of the recent (21%) downturn. It trails Peru, Sri Lanka, China and India."

Indeed, after a 50% fibonacci retracement since the March lows, Russia has used its recent reprieve and the opportune windows provide by developed markets as fulcrum to stage another gala rendition (even at the face of a mighty performance by developed economies.)

Bottom line: ``developed markets have been holding their own against emerging markets" because of the rotational effects and global liquidity transmission of the global inflation dynamics more than representative of idiosyncratic strength or traits.

At the end of the day, emerging markets has still patently outperformed its developed counterparts under present "ultra loose monetary" conditions.

Friday, March 27, 2009

Global Stock Market Performance Update: The Charge of the BRICs

Year to date updated national stock market benchmark performances by Bespoke Invest...(as of March 26th)

Says Bespoke (bold highlight mine), ``Twenty-one countries are up year to date, while 62 are down. One positive that can be drawn from this table is that all four BRIC countries are now in the black for 2009. These countries were the leaders during the last bull market, and they have also been some of the biggest decliners during the bear. The fact that these key countries are now trending upward is a sign that global investors are beginning to take more risk. China is up the most of all countries at 29.71%, while Russia is up 19.11%, Brazil is up 12.13%, and India is up 3.69%."

My comment:

Risks can be defined in relative and/or subjective terms.

US policies have presently been directed towards the "nuclear option" of currency devaluation via the Quantitative Easing or "Gonoism". These suggest of increasing inflation, credit and currency risks for the US. Alternatively, the rising risk profile of the US implies that US assets are becoming "riskier" relative to the BRICs.

Besides, given that international portfolio flows are expected to markedly contract, the positive performances of the BRICs and EM economies could be a consequence of local savings flowing into local assets in response to the global negative interest rates regime.

This has been the case of the Philippine Phisix, which I suspect has been the same dynamic driving most of the BRICs or EM markets.

So one data can be interpreted from two opposing angles.

More from Bespoke ``Unfortunately, all of the G-7 countries are still in the red year to date. Canada has been the best among them, while Italy has been the worst. With a decline of 9.11% year to date, the US is performing slightly worse than the unweighted average of all countries."

My comment: If G-7 countries are down while BRIC are up, isn't this a sign of "decoupling"?

Sunday, February 15, 2009

Fruits From Creative Destruction: An Asian and Emerging Market Decoupling?

``But innovation, in Schumpeter’s famous phrase, is also “creative destruction”. It makes obsolete yesterday’s capital equipment and capital investment. The more the economy progresses, the more capital formation will it therefore need. Thus, the classical economist-or the accountant or the stock exchange-considers “profit” is a genuine cost, the cost of staying in business, the cost of a future in which nothing is predictable except that today’s profitable business will become tomorrow’s white elephant.”- Peter F. Drucker, Profit’s Function, The Daily Drucker.

We read from creditwritedowns.com that Morgan Stanley Asia Chairman Stephen Roach made some predictions, namely:

1 “Asia will have a less acute impact from the global financial and economic crisis”

2. “Export-led regions are followers, not leaders.” Hence would recover after their main export markets, the US and Europe, recovered.

3. “The only possibility (to recover earlier) is China, as it has large infrastructure spending in place that could provide support for economic growth.”

Dr. Roach has been one of the unassuming well respected contrarian voices, whom I have followed, who sternly warned of this crisis.

Nonetheless while we agree with some of his prognosis, where we depart with Dr. Roach is on the aspect of a ‘belated recovery’ of Asia because of its “export dependence” on US and Europe.

Creative Destruction: The Telephone Destroyed The Telegraph

While it is true that the Asian model had functioned as an export-led region over the past years, our favorite cliché, ``Past performance does not guarantee future results” would possibly come into play in the transformation of the playing field.

Let us simplify, if a business paradigm doesn’t work do you insist on pursuing the same model or do you attempt a shift?

Marketing Guru Seth Godin has a terse but poignant depiction of “solving a different problem” response to our question. We quote the terrific guru Mr. Godin,

``The telephone destroyed the telegraph.

``Here's why people liked the telegraph: It was universal, inexpensive, asynchronous and it left a paper trail.

``The telephone offered not one of these four attributes. It was far from universal, and if someone didn't have a phone, you couldn't call them. It was expensive, even before someone called you. It was synchronous--if you weren't home, no call got made. And of course, there was no paper trail.

``If the telephone guys had set out to make something that did what the telegraph does, but better, they probably would have failed. Instead, they solved a different problem, in such an overwhelmingly useful way that they eliminated the feature set of the competition.” (bold highlight mine)

In short, we see human action basically at work. To quote Ludwig von Mises, ``Action is an attempt to substitute a more satisfactory state of affairs for a less satisfactory one. We call such a willfully induced alteration an exchange.”

People who relied on old models didn’t see this coming. They would have resisted until they were overwhelmed.

The fact is the telephone replaced an entrenched system. Joseph Schumpeter, in economic vernacular coined this as “creative destruction”. And creative destruction essentially leads to new operating environments: the rise of the telephone.

Similarly, the Asian export model has been built upon the US credit bubble structure. That bubble is presently deflating and would most possibly dissipate. So is it with Europe’s model.

In other words, the global economy’s trade and investment framework will probably reconfigure based on the present operating economic realities. Countries and regions would probably operate under a set of redefined roles.

Here are three clues of the possible creative destruction transformation.

Deepening Regionalism


Figure 3: ADB: Emerging Asian Regionalism

This from the ADB’s Emerging Asian Regionalism, ``In large part due to the growth of production networks just discussed, trade within Asia has increased from 37% of its total trade in 1986 to 52% in 2006 (Figure 3.3). The share of trade with Europe has risen somewhat, while that with the US and the rest of the world has fallen. As set out in Chapter 2, Asia’s intraregional trade share is now midway between Europe’s and North America’s. It is also higher than Europe’s was at the outset of its integration process in the early 1960s.

``But trade has not been diverted from the rest of the world. On the contrary, trade with each of Asia’s four main partner groups has increased in the last two decades—not just absolutely, but also relative to Asia’s GDP (Figure 3.4). For example, Asia’s trade with the EU has more than doubled as a share of its GDP, from 2.6% in 1986 to 6.0% in 2006. The increase is even larger as a share of the EU’s GDP. The aggregate trade data thus suggests that Asia is steadily integrating both regionally and globally.”

The fact is that Asia has steadily been regionalizing or developing its intraregional dynamics even when the bubble structure had been functional. Today’s imploding bubble isn’t likely to alter such deepening trend.

Moreover, the current unwinding bubble structure is emblematic of a discoordination process from a ‘market clearing’ environment.

Under this phase, spare capacities are being shut or sold, excess labor are being laid off, surplus inventories are being liquidated and losses are being realized. Essentially new players are taking over the affected industries. And new players will be coming in with fresh capital to replace those whom have lost. Fresh capital will come from those economies with large savings or unimpaired banking system (see Will Deglobalization Lead To Decoupling?)

And like any economic cycles, this adjustment process will lead to equilibrium. Eventually a trough will be reached, where demand and supply should balance out and a transition to recovery follows.

The post bubble structure is likely to reinforce and not reduce this intraregional dynamic.

So in contrast to the notion of a belated recovery in Asia hinged on the old decrepit model, a China recovery should lift the rest of Asia out of the doldrums.

Asia and not the old stewards should lead the recovery based on the new paradigm.

And in every new bullmarket there always has been a change in market leadership. We are probably witnessing the incipience of such change today.

Real Savings Function As Basic Consumption

The assumption of the intransigence of Asia as an export led model is predicated on Keynesian theory of aggregate demand. In essence, for as long as borrowing and lending won’t recover in the traditional ‘aggregate demand’ economies, there won’t be a recovery in export led economies.

But in contrast to such consensus view, demand is not our problem, production from savings is.

According to quote Dr. Frank Shostak, ``At any point in time, the amount of goods and services available are finite. This is not so with regard to people’s demand, which tends to be unlimited. Most people want as many things as they can think of. What thwarts their demand is the availability of means. Hence, there can never be a problem with demand as such, but with the means to accommodate demand.

``Moreover, no producer is preoccupied with demand in general, but rather with the demand for his particular goods.”

``In the real world, one has to become a producer before one can demand goods and services. It is necessary to produce some useful goods that can be exchanged for other goods.”

A sole shipwrecked survivor in an island will need to scour for food and water in order to consume. This means he/she can only consume from what can be produced (catch or harvest). It goes the same in a barter economy; a baker can only have his pair of shoes if he trades his spare breads with surplus of shoes made by the shoemaker.

Surplus bread or shoes or produce, thus, constitute as real savings. And to expand production, the shoemaker, the baker or even the shipwrecked survivor would need to invest their surpluses or savings to achieve more output which enables them to spend more in the future.

Instead of getting x amounts of coconuts required for daily nourishment, the shipwrecked survivor will acquire a week’s harvest and use his spare time to make a knife so he can either make ladder (to improve output), build a boat (to catch fish or to go home) or to hunt animals (to alter diet) or to make a shelter (for convenience). Essentially savings allows the survivor to improve on his/her living conditions.

To increase production for the goal of increasing future consumption, the savings of both the shoemaker and the baker would likely be invested in new equipment (capital goods).

Again to quote Dr. Shostak (bold highlight mine), ``What limits the production growth of goods and services is the introduction of better tools and machinery (i.e., capital goods), which raises worker productivity. Tools and machinery are not readily available; they must be made. In order to make them, people must allocate consumer goods and services that will sustain those individuals engaged in the production of tools and machinery.

``This allocation of consumer goods and services is what savings is all about. Note that savings become possible once some individuals have agreed to transfer some of their present goods to individuals that are engaged in the production of tools and machinery. Obviously, they do not transfer these goods for free, but in return for a greater quantity of goods in the future. According to Mises, "Production of goods ready for consumption requires the use of capital goods, that is, of tools and of half-finished material. Capital comes into existence by saving, i.e., temporary abstention from consumption.”

``Since saving enables the production of capital goods, saving is obviously at the heart of the economic growth that raises people's living standards. On this Mises wrote, “Saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material condition of man; they are the foundation of human civilization.”

So what changes this primitive way of production-consumption to mainstream’s consumption-production framework?

The answer is debt. Debt can be used in productive or non-productive spending. But debt today is structured based on the modern central banking.

Think credit card. Credit card allows everyone to extend present consumption patterns by charging to future income. If debt is continually spent on non-productive items, it eventually chafes on one’s capacity to pay. It consumes equity. Eventually, overindulgence in non productive debt leads bankruptcy. And this epitomizes today’s crisis.

But debt issued from real savings can’t lead to massive clustering of errors (bubble burst) because they are limited and based on production surpluses. It is non productive debt issued from ‘something out of nothing’ or the fractional banking system combined with loose monetary policies from interest manipulations that skews the lending incentives and enables massive malinvestments.

To aptly quote Mr. Peter Schiff’s analysis of today’s crisis, ``Credit, whether securitized or not, cannot be created out of thin air. It only comes into existence though savings, which must be preceded by under-consumption. Since savings are scarce, any government guarantees toward consumer credit merely crowd out credit that might otherwise have been available to business. During the previous decade too much credit was extended to consumers and not enough to producers (securitization focused almost exclusively on consumer debt). The market is trying to correct this misallocation, but government policy is standing in the way. When consumers borrow and spend, society gains nothing. When producers borrow and invest, our capital stock is improved, and we all benefit from the increased productivity.”

Now if capital comes into existence by virtue of savings, we should ask where most of the savings are located?

The answer is in Asia and emerging markets.

Figure 4: Matthews Asian Fund: Asia Insight

According to Winnie Puah of Matthews Asia, ``The economic potential and impact of Asian savings have yet to be fully unleashed at home. Indeed, Asia’s excess savings fuelled the recent boom in U.S. consumption and housing markets. Creating a consumption boom in Asia would mean that Asia needs to borrow and spend more. To date, governments are supporting domestic demand with fiscal stimulus packages—but it is household balance sheets that hold the key to developing a consumer culture. Overall, Asian households are well-positioned to increase spending—most have low debt levels and high rates of savings… there is a noticeable divergence in saving patterns between emerging and mature economies over the past decade, particularly since Asia learned a hard lesson from being overleveraged during the Asian financial crisis. Today, most Asian households save 10%—30% of their disposable incomes. China’s households, for example, have over US$3 trillion in savings deposits but have borrowed only US$500 billion.”

Thus I wouldn’t underestimate the power of Asia’s savings that could be converted or transformed into spending.

Asia’s Tsunami of Middle Class Consumers

In my August 2008 article Decoupling Recoupling Debate As A Religion, we noted of the theory called as the “Acceleration Phenomenon” developed by French economist Aftalion, who propounded that a marginal increase in the income distribution of heavily populated countries as China, based on a Gaussian pattern, can potentially unleash a torrent of middle class consumers.

Apparently, the Economist recently published a similar but improvised version of the Acceleration Phenomenon model. And based on this, the Economist says that 57% of the world population is now living in middle class standards (see figure 5)!


Figure 5: The Economist: The Rise of the Middle Class?

From The Economist (bold highlights mine), ``In practice, emerging markets may be said to have two middle classes. One consists of those who are middle class by any standard—ie, with an income between the average Brazilian and Italian. This group has the makings of a global class whose members have as much in common with each other as with the poor in their own countries. It is growing fast, but still makes up only a tenth of the developing world. You could call it the global middle class.

``The other, more numerous, group consists of those who are middle-class by the standards of the developing world but not the rich one. Some time in the past year or two, for the first time in history, they became a majority of the developing world’s population: their share of the total rose from one-third in 1990 to 49% in 2005. Call it the developing middle class.

``Using a somewhat different definition—those earning $10-100 a day, including in rich countries—an Indian economist, Surjit Bhalla, also found that the middle class’s share of the whole world’s population rose from one-third to over half (57%) between 1990 and 2006. He argues that this is the third middle-class surge since 1800. The first occurred in the 19th century with the creation of the first mass middle class in western Europe. The second, mainly in Western countries, occurred during the baby boom (1950-1980). The current, third one is happening almost entirely in emerging countries. According to Mr Bhalla’s calculations, the number of middle-class people in Asia has overtaken the number in the West for the first time since 1700.”

So apparently, today’s phenomenon seems strikingly similar to Seth Godin’s description of the creative destruction of the telegraph.

The seeds of the rising middle class appear to emanate from the wealth transfer from the developed Western economies to Asia and emerging markets. Put differently, Asia and EM economies could be the fruits from the recent ‘creative destruction’.

Some Emerging Signs?

However, there are always two sides to a coin.

For some, the present crisis signify as a potential regression of these resurgent middle class to their poverty stricken state, as the major economies slumps and drag the entire world into a vortex.

For us, substantial savings or capital (the key to consumption), deepening regionalism, underutilized or untapped credit facilities, rapidly developing financial markets, a huge middle class, unimpaired banking system, and most importantly policies dedicated to economic freedom serve as the proverbial line etched in the sand.

One might add that the negative interest rates or low interest policies and the spillage effect from stimulus programs from developed economies appear to percolate into the financial systems of Asia and emerging markets.

Although these are inherently long term trends, we sense some emergent short term signs which may corroborate this view:

1. Despite the 30% slump in the global Mergers and Acquisitions in 2008, China recorded a 44% jump to $159 billion mostly to foreign telecommunication and foreign parts makers (Korea Times). Japan M&A soared last year to a record $165 billion in 2008 a 13% increase (Bloomberg).

2. Credit environment seems to be easing substantially.

According to FinanceAsia (Bold highlights), ``The fallout from Japan's banking crisis offers clues to how the current situation may resolve itself. Back then, healing started first in the areas that had been most affected -- interbank lending recovered earliest, followed by credit markets, volatility markets and finally, many years later, equity markets.

``In today's crisis, interbank lending is already starting to recover. The spread between three-month interbank lending rates and overnight rates, which provides a key measure of the health of credit markets, has dropped significantly from its peak of 364bp in early 2008 down to less than 100bp today. As the interbank market recovers, credit should be next to heal.

``However, at the moment, triple-B spreads are at their highest levels in more than 100 years, which makes credit look like an extremely attractive investment opportunity. And there is every reason to expect that Asian corporates will participate in the healing, perhaps even as quickly as their counterparts in the US. (Oops and I thought everyone said divergence wasn’t possible or decoupling is a myth)

3. Asian companies have begun to engage in debt buyback. Again from FinanceAsia, ``Asian companies are buying back their debt with gusto and this could be a sign that credit markets are on the mend, according to Morgan Stanley.

``Asian companies are betting that credit will offer the best returns in 2009 and, like the smart traders they are, executives in the region are busy buying back their debt with gusto.

4. A picture speaks a thousand words…


Figure 6: A BRIC Decoupling?

China and Brazil appear to be leading the BRIC recovery while India (BSE) and Russia (RTS) seem to initiating their own.

For financial markets of developed economies, don’t speak of bad words.




Thursday, August 21, 2008

Sports Globalization: NBA Goes Emerging Markets!

Last January, the widely followed US National Basketball Association (NBA) formed its overseas arm, NBA China, to expand its basketball league to cover at China.

This from NBA, ``Five strategic partners will invest $253 million to acquire 11% of the company in preferred equity. The strategic partners are an elite group of exceptionally prominent and successful entities: ESPN, a division of The Walt Disney Company, Bank of China Group Investment, Legend Holdings Limited, Li Ka Shing Foundation and China Merchants Investments.”

We further read that the NBA plans to develop teams of professional players from about 10 cities in the coming years and help install more than 800,000 basketball goals throughout China, making the popular game even more accessible!

It doesn’t end here. NBA now plans to stretch its exposure to India!

From Steve Kyler of hoopsworld.com (highlight mine), ``[NBA Commissioner] David Stern also dropped hints that China may be the first stop of the NBA in Asia, but said he and his staff did meet with officials from India, where the NBA recently held a Basketball Without Borders stop. Stern pointed to India as an area where the NBA sees tremendous interest in basketball, and is open to exploring opportunities for the NBA to help develop the game in India. Europe may be stealing a few middle tier NBA players, but it seems the NBA is more focused on exploiting the billion fan markets of Asia.

The Moral of NBA’s actions: FOLLOW the MONEY!