Don't lump emerging Asia with Brazil, India, Turkey and South Africa
Emerging markets have become the new focus for investors' fears, leading to capital outflows, sharp falls in local currencies and interest rates rising.
SCMP headline, February 14
It's a frequent lament these days. The Fed has reversed itself, the days of easy money are numbered, capital will now flow back to the United States and emerging markets will crash. Doom is upon us. Get out now, all ye who may.
Here are a few observations. Firstly, I hardly see a reversal of monetary policy in the US. Instead of flooding a Mississippi River of cash into the system, the Federal Reserve Board is now flooding the economy with a slightly lesser Missouri River of cash.
And, lest anyone complains of being parched, the Fed will turn on the Mississippi again. The US is hooked on easy money worse than a junkie on drugs.
Secondly, there is Jake's No 3 Rule of Investment to consider - it's in the price if it's in the press. Has anyone not heard that the pundits have announced a funeral for emerging markets? Investors have had plenty of time to leave. Those who have not yet gone probably consider the death notice sufficiently discounted into prices.
Finally, consider what most people who talk this talk mean at present by emerging markets: they mean the BRITS markets - Brazil, India, Turkey and South Africa.
And they are wrong to call those emerging markets. They are the submerging markets. Every now and then they rise to the surface for another crew of credulous new investors to drown and then back they go under again.
Let's talk about Asian emerging markets and where they stand in all this. What I have done in the first chart is work out an index in US dollar terms of Asian markets weighted by recent market capitalisation. The markets represented are Korea, Taiwan, Hong Kong (all those China listings have demoted us to emerging again), the Philippines, Thailand, Malaysia, Singapore and Indonesia.
I have then calculated a relative performance of this index to the Standard & Poor's 500 index in the US.
The results show you the Asian markets crash of 1997-1998, followed by a 12-year period in which Asian stocks generally outperformed US ones. Somewhere around 2010 things reversed and Asian stocks began to underperform, and that trend continues.
What we have here is continued irrational pricing of investment assets in the US due to easy money. People thought it might end with recovery from the 2008 financial crisis - but no, the US is hooked on easy money and the steady Asian underperformance reflects that.
That means nothing has changed recently and that the BRITS markets are submerging again because they always do.
The second chart, a GDP-weighted index of currency performance by the same Asian group against the US dollar, shows the same trends. The 1997 currency crash clearly shows up but overall there has been only very slight weakness against the US dollar recently, if any at all.
Splendid singing of that dirge, though.