Investors in the Far East have generally been well rewarded over the last year, but are there problems ahead for markets in Japan, China and India? Brian Tora considers the threats and opportunities and suggests that the investment party isn’t over quite yet.
With all the excitement engendered by the election of Donald Trump as US President, not to mention Brexit, several European elections and continuing concerns over debt in the Euro zone, it has been all too easy to ignore what is going on at the other side of the world. True, China has received the odd mention recently, primarily as a result of President Trump promising trade barriers against the world’s second largest economy, but Japan and the rest of the Far East appear to have dropped below the investment radar.
As it happens, both China and Japan have rewarded investors well over the past year. If there are any concerns over whether China will be impacted by a more protectionist United States, there has been little sign of it. And Japan, while still looking demographically challenged and over indebted, is maintaining momentum in the stock market, even if indices are still little more than half the level reached nearly 30 years ago.
But debt is an issue in these countries. China, which is home to four of the five largest banks in the world in terms of assets, has seen its share of global debt multiply fivefold over the past decade. Under prime minister Abe, Japan has embarked upon a massive quantitative easing programme to try to boost the economy. Inflation is being actively encouraged there, though as in other countries that have adopted easy money policies, it has failed to develop to any great extent.
For investors, the Far East was long considered the natural successor to the wealthy developed nations of Europe and North America. Large, aspirant populations, enjoying a strong work ethic and coming from a lower economic base – it seemed they must enjoy significantly faster growth as industrialisation and globalisation took hold.
Indeed, this has been the case, although there is little doubt that valuation levels got ahead of the game. The retrenchment in markets appears to have come to an end, so it is the future with which investors need to concern themselves. The omens look encouraging. China grew at 6.7% last year according to recently published statistics. India’s fourth quarter GDP numbers came in at plus 7% – down from the previous quarter’s 7.4%, but still ahead of expectations.
India trails China significantly in terms of per capita GDP, so has considerable ground still to make up. Moreover, Chinese growth is moderating – a trend confirmed by recent money supply figures. But with a growing middle class and a high savings rate, it seems that China can maintain above global average economic growth simply on the basis of internal demand, something which is becoming increasingly important to the nation.
But nothing is ever so straightforward that an investment call is obvious. Could a credit crisis de-rail China’s growth? Possible, but at least Chinese personal debt is relatively low and there is a current account surplus, so the economy does not look at as great a risk as many feared. It remains a tricky market, though, with interference from the government a perpetual threat.
India looks exciting
So might India prove a better bet? The decision last year to cancel many of the bank notes in circulation highlights a potential risk here. India is very much a cash economy. As such it is open to corruption and tax avoidance. Indeed, these are the reasons for the action taken by the government as they sought to uncover money not declared to the authorities. But with the Indian population expected to overtake that of China in a decade or two, the opportunities for the world’s largest democracy do look exciting.
As for Japan, the jury is still out on whether Abenomics will work. A weakening yen has helped the nation’s competitive position, but this has also reduced the returns to UK investors. While Japan has the lion’s share of global business leaders, it probably offers the least appealing prospects amongst these three giants of Asia.
While the more statesmanlike speech delivered to Congress by President Trump at the very end of February did much to calm nerves in America and its allies, investors would do well to keep Far Eastern markets in their sights. The new President’s desire to create jobs in the US could well be fulfilled by the infrastructure and defence spending plans he has outlined, so perhaps any impact on China will be limited after all. The economic focus of the world looks set to continue to drift east.