Investing in 2014: How About Asia?

by Elliott Morss, Morss Global Finance

Introduction

A colleague recently sent me a piece arguing there is a bull market ahead for Vietnam. The piece was based on an interview with the head of Dragon Capital, the second largest shareholder of stocks in Vietnam behind the government. It would be quite troubling if such an investor were not bullish about where its money was placed. So I thought it might be worth taking a more balanced view of possible Asian investments by comparing Vietnam with other countries in the region.

Why Asia?

One might start by asking this question. The answer: Asia as a region is growing economically more rapidly than any other region in the world (Table 1). I am bullish on the US economic future, but even more so for Asia.

Table 1. – Real GDP Growth Rates,

Major Economic Regions and the US

Source: IMF WEO Data

Growth rates are hardly the only standard by which to judge countries for investments. One should also be concerned by how countries are being managed/governed. One indicator of economic management is government debt. Data presented in Table 2 show debt is much lower in Asia (and declining further) than in any other region and dramatically lower than in the US.

Table 2. – Gross Government Debt,

Major Economic Regions and the US (% GDP)

Source: IMF WEO Data

Currency Changes

Another factor needs to be kept in mind before making investments in foreign lands. As I have noted in an earlier piece, with the ending of the Federal Reserve’s quantitative easing program, US interest rates will rise. This will draw significant funds back into the US, and as a result, the dollar will strengthen relative to other countries’ currencies. That means if you make investments outside of the US, you will lose money when and if you liquidate back into US dollars. Putting it slightly differently, if your “home currency” is the US dollar, you will hopefully make capital gains on your Asian investments but lose a bit from switching back into dollars.

So most Asian currencies will weaken relative to the dollar. That will make their exports more competitive. On the negative side, there might be problematic capital outflows from countries running large current account deficits. Current account data are presented in Table 3. Europe and Asia are running current account surpluses. As a consequence, their currencies are likely to be affected less by capital flowing to the US than Latin America.

Table 3. – Current Account Balances

Major Economic Regions (% GDP)

Source: IMF WEO Data

OK. So from a macro economic perspective, Asia looks quite strong.

Where to Invest in Asia?

Asian countries with stock markets are presented in Table 4 giving their size as measured by GDP in US dollars and GDP growth rates for 2013 and projected for 2014. In this and following tables, I also include the US. The growth rates of all countries are impressive.

Table 4. – GDP and Real GDP Growth Rates, Asian Countries and US

Source: IMF WEO Data

Consider next how the countries are managed. Data on both government deficits and gross debts are presented in Table 5. India’s deficits and debts are extremely worrisome, while the deficits of Malaysia and Vietnam merit watching. While Singapore is the only country with a government surplus, it has relatively high debt. Japan’s debt is extremely high. Much of it is held by Japanese citizens who have lost a lot investing in Japanese equities.

Table 5. – Government Deficits and Debt, Asian Countries and US

Source: IMF WEO Data

Finally, the current accounts of these countries are presented in Table 6. Here again, India is extremely worrisome. In earlier postings, I have expressed serious misgivings about India and its government, and there is nothing in the data reported here that changes my views. Singapore’s positive current account balance is huge.

Table 6. – Current Account Balances, US and Asian Countries

Source: IMF WEO Data

But beyond India, what does the data say? Based strictly on macro economic conditions, China, The Philippines, and Thailand stand out. The government deficits of Malaysia and Vietnam are high enough to hold them back and the propensity of the Vietnam government to “meddle” in a counter-productive way is a further reason to be concerned. Thailand has performed well during many political crises and it is facing another today.

Of course, macro economic performance alone is no reason to invest in a country, so consideration is now given to each country’s stock market. This is done in Table 7 via country-specific ETFs where countries are ranked by the ETF’s Price to Earnings ratios (P/E).

Table 7. – US and Asian Country ETFs

Source: Yahoo Finance

China’s low P/E is quite surprising given how strong its macroeconomic indicators are. Given the political turmoil in Thailand, a low P/E is not surprising. Vietnam also has a low P/E. It bears watching. Neither Indonesia nor Malaysia impresses me. And The Philippines, while economically interesting, does have a high P/E.

Personal Reflections

I have worked in all these countries, either as a consultant to a government development agency or as a private investor with Chinese partners. My observations:

• The Chinese are hard working, pragmatic and eager to make money;
• I don’t understand South Korea;
• Thailand is a great country that early on understood how to serve Western clients. But it has a history of political problems that continue.
• The Vietnamese are the hardest working people in the world. If only the government would ease up on trying to control the private sector.
• I don’t understand Japan.
• Singapore pays government employees well and as a result is as well-managed country as there is. A safe bet.
• The Chinese are very important in Indonesia and Malaysia.
• The Philippines is a very interesting country. After numerous false starts, I see it as on the right track.

Conclusions

Putting all the data together, China appears to be the most attractive Asian country for investments. Vietnam has a low P/E but also a relatively high government deficit. With the exception of China, The Philippines is the strongest economically but that is reflected in a high P/E. Relative to the US and the rest of the world, Asia looks very attractive for investments. In a follow-up article, I will look more closely at the Philippines.