How will Asia fare in the next market adjustment?
Andrew Sheng says with 2017 marking the 10th and 20th anniversary respectively of the global and Asian financial crises, among the lessons drawn must be an acknowledgement that in a time of radical uncertainty, it pays to think holistically about the broader trends
April is the cruellest month, so said the poet TS Eliot. But one wit remarked that June marks the end of May. Who would have expected that British Prime Minister Theresa May would lose her majority in Parliament in the June election, which was supposed to strengthen her hand in negotiating Brexit with the European Union?
In sharp contrast, unlike earlier in the year when everyone was worried about France falling to populist rule under Marine le Pen, a fresh centrist candidate named Emmanuel Macron won, and was rewarded by a handsome legislative majority to carry out his promise to reform France.
In Bangkok this week to refresh memories of July 2, 1997, I was struck by how history seemed to rhyme in 10-year cycles. Next month marks not only the 20th anniversary of the return of Hong Kong to Chinese rule, but also the 20th anniversary of the Asian financial crisis, when the baht was devalued. This year also marks the 10th anniversary of the US subprime crisis, which, together with the European debt crisis, caused a decade of low growth for the advanced economies.
On July 19, 2007, the Dow Jones touched a record high of 14,000. It fell below 11,000 on September 15, 2008, following the failure of Lehman Brothers, then fell to a 12-year low of 6,547 on March 9, 2009, recording a 53.2 per cent drop over the period.
Similarly, the Hong Kong Hang Seng Index rose to an all-time peak of 31,958 on October 18, 2007. A year later, it lost 66.6 per cent and fell to a low of 10,676 on October 27, 2008.
Ten years later, both indices have once again touched record highs, with the Hang Seng recovering past the 26,000 mark this month, while the Dow hit a record peak of 21,528 this week.
These market gyrations suggest that another consolidation may be reached sometime soon, except we do not know the exact timing or trigger. All we know is that there are many risks out there, including policy uncertainties from whether the Fed will continue to raise interest rates, the sudden reappearance of inflation and possible geopolitical or natural disasters.
The stark reality is that no one knows for sure whether we are in “overpriced” territory or a bubble zone. The US economy appears to be trundling along in reasonable shape, with unemployment figures reaching new lows. All we do know is that asset prices are at record highs, financed by historically high debt and abnormally low interest rates.
In this zone of radical uncertainty, we are no longer sure that GDP reflects the true state of the economy. Gross domestic product measures the old resource-based economy well, but does not capture growth in a data-driven digital economy. No economy reflects this contradiction more than China, which has shifted from being the largest assembler of the global supply chain towards a consumption and service-driven economy. Both consumption and services crossed the 50 per cent of GDP level, moving the country closer towards an advanced-country pattern where consumption and services account for roughly 60-70 per cent or more of GDP.
If China succeeds in this historic transition, it could break through its middle-income trap. But one recalls that South Korea achieved OECD status in December 1996, only to be hit by the Asian financial crisis in 1997-98.
All countries go through growing pains, especially what Joseph Schumpeter called “creative destruction”. This transition creates massive winners and also losers. We see this pattern being reflected in the mixture of top Dow Jones index component companies, whereby the leading tech stocks are being priced to win, whereas the old energy, manufacturing and distribution companies are struggling to maintain their market share.
Given these radical uncertainties, history is replete with the rise and fall of nations, as well as the rise and fall of companies. It teaches humility in forcing us to think holistically about the broader trends, whilst sorting out the signals from the noise.
Emerging markets in Asia today are facing the middle-income trap, whereby they need to break through a pain barrier to rise to advanced-income status. Advanced and ageing economies like Britain and Japan face the opposite, a high-income trap where a major policy mistake could cause it to slide into stagnation and possible lower income levels.
Ultimately, demographics and geography determine destiny. Asia may face many growing pains and a complex operating environment from disruptive technology and excessive competition, including geopolitical rivalry. Western analysts disdainful of Asian demagogues are now being haunted by their own demagogues.
Despite all the noise, we would do well to remind ourselves that Asia is still where there is demographic and technological growth. Let’s see whether the next market adjustment will stall or disrupt that growth trajectory.
Happy 10th and 20th anniversaries!
Andrew Sheng is a distinguished fellow at the Asia Global Institute, University of Hong Kong