Emerging Market Equities Now Far More Interesting than U.S. Market

Now that the US market is settling comfortably into a statist torpor, it is time to call attention to the fact that America faces challenges of an entirely different kind than it ever has in the past. This generation of Americans simply doesn’t know what’s going to hit it.

Shanghai Composite Index vs. S&P 500

Wealth comes from sweat and smarts. Here’s a factoid for you: China has 60 million elementary and secondary school students studying piano or orchestral instruments and playing classical music. America has 30 million students, total. China has classical music students at twice the number of all American students waiting in the pipeline to join the job market. Add to these the smart Indian kids who will be graduating from India’s technical institutes with the world’s sharpest math skills, and it seems likely that during the next five or ten years, a good 75% of the best-qualified job market entrants will come from China and India.

I cite the classical music students in order to emphasize that we are not talking about robotic nerds who know how to crunch numbers but have no creative ability. A “Spengler” essay from last December provides some detail. Anyone who has not been hiring young Asians has no clue how cultured and curious they are. Their American counterparts have seen life as a perpetual spring break interrupted by brief episodes of work, and are simply in no shape to compete.

In past years, to be sure, the smartest Asians came to America. That’s where the capital markets were. A rich Chinese wouldn’t lend money to a poor Chinese, unless the poor Chinese first moved to America. Our financial system was the glory of the world. That was then. If you are a smart Chinese or Indian entrepreneur, are you likely to get richer by moving to the US or by staying at home? Emerging market equities are a far more interesting proposition than the US stock market under Emperor Obama I. Bonus restrictions? Compensation caps? They never heard of them in Mumbai or Shanghai.

America isn’t getting the immigrants any more, that is, the top-of-the-line human capital. As China reorients its economy towards domestic spending, America won’t get the capital, either. America isn’t going to crash. Unless it changes course, it will slowly sink into the mud, like England did during the 20th century.

Equity investment is worth considering in China and India. China’s doing a great job of providing a serious stimulus, and India’s Congress Party victory puts a very qualified Prime Minister into power. It’s a snooze here in the Republic of Zombies.

Comments

[PastTense]

Unfortunately the stock markets and accompanying government regulation cannot be trusted in India and China.

2009 May 21 04:13 AM

[Mad Hedge Fund Trader]

Forget everything else. 1) Investors which took my New Year advice to load up on emerging markets are now facing the vexing problem of what to do with all of their new found wealth. The emerging market ETF has soared by 57% to $33, and two of my favorites, the China ETF and India ETF’s, have doubled from their bottoms. The average emerging stock market is now up 50% on the year. The good news is that I believe this is just the down payment on a multiyear, tenfold move for many of these markets. The bad news is that all of these markets are way overbought on a short term and technical basis, and that we have to expect pullbacks this summer that could give up as much as half of the recent move. If you are a trader, take the money and run. If you are a long term investor, no pain no gain. But I don’t think any of these high growth plays are going to revisit the 2008 lows. Those were once in a century bottoms. This is the only long equity exposure you should have for the next decade.

2009 May 21 07:56 AM

[Expat in Tokyo]

I work and live in Tokyo and have lived here 5 of the last 12 years. You are naive to think that every student that graduates in China or India have received equivelant educations as American students.

I am an engineer manager and have been for 15 years. Only around 25-30% of the Chinese engineers are equivilent to US engineering graduates They are getting better every year. But the vast majority are not nearly as productive as the US or Japanese engineers. Their schools as are not as good as US and Western universities and will not be for a while. The Indian technical schools are good, but they are few in number.

With that fact base on my experience in Asia there still are a heck of lot of Chinese and Indian graduates each year.

So the American technical workforce is still the world's best overall and will remain so for the next 25 years. Yes, the rest of the world is gaining but not anywhere near the rate that many people prophetize - who only look at the raw numbers of students!

2009 May 21 08:56 AM

[donzelion]

"Now that the US market is settling comfortably into a statist torpor, it is time to call attention to the fact that America faces challenges of an entirely different kind than it ever has in the past."

I hope you appreciate the irony: which emerging markets are less statist than the U.S., even with the far-reaching changes proposed so far?

"America isn’t getting the immigrants any more, that is, the top-of-the-line human capital."

Indeed, mostly because the H1B visa system is so restrictive, and other anti-immigration policies make legitimate, top-line human capital unwilling to come to America, while illegal immigrants flock across the borders (at least, when labor conditions are favorable - the crisis has led to a pretty substantial reversion of immigrants from the states).

Among Asians (spend some time in India and China, and work with skilled professionals like I have for a few years to verify this), studying in America or Europe is a highly monetizable experience: if you've received an MBA from a US elite school, you put your name down on capitalization efforts - and have a chance of earning millions of dollars with only a few years of work. Further, where an Anglo-American sees a 2-year stint abroad as potential career death, non-Anglo Americans see it as part of an overall effort to seek opportunities. Expatriate careers spanning the Pacific, Atlantic, and Indian oceans change a great deal about employability and opportunity for individuals, but do not necessarily change fundamentals about what makes a country succeed.

2009 May 21 10:24 AM

[AndrewBaker]

Yes, the emerging economies are going to grow faster than those in the west, but they will need western support for their exports for a long while yet. Their own domestic markets are growing, but cannot yet do within ours. In truth, we need each other. Asian and emerging markets have jumped ahead of us based partly on the belief that the US economy is about to recover: when it is apparent that this is not true, they will fall back along with ours, and probably harder. Diversify out of dollar assets by all means, but don't think you can get invest without regard to the US economy. The world is too small.

2009 May 21 11:01 AM

[Joe Bruin]

I agree with most of the points in this article. However, I would argue that America has one huge advantage that these other countries do not have. I am an immigrant, by the way.

America will continue to attract people because there is social mobility. America doesn't care where you came from or how you look like. If you study and get get good grades you will have the opportunity to attend a good university even if you are poor. It would be impossible for a poor kid from India, China or any other developing country to accomplish this task.

I know this first hand because I put myself through college. My parents paid for a 50 cc Honda scooter, a computer, and one month rent during my college years. I worked part time during the school year and full time during the summer. It took me five years to graduate from UCLA. I graduated with $0 debt. I seriously doubt that I am the only person who has been able to climb the social latter.

Social mobility is so important to a country and its economy. Talent should always be allowed to grow no matter it's form - race, sex, height, financial worth. You can take me as an example. I now work as a application/web developer. I can create any web site or desktop application that a company may need. I contribute to the tax base and to American society. I still dream of having my own company that will employ other Americans.

Thanks for reading and God bless America, land of the brave and free.

2009 May 21 11:14 AM

[Danny Furman]

Well written article...
"Wealth comes from sweat and smarts"- need any more be said?
China is way ahead of the rest of the world in the combination of those qualities. India has the smarts, as do many wetsern nations, but nobody has China's goal-oriented work ethic (you think we could have pulled off an Olympics like that, even spending $5T? no chance).
Lastly, anyone consumed by China's Communist past or government control is entirely missing the picture. Money is being made and certain companies are raking it in. Government involvement is a huge plus for any company on the govt's good side.
Profitable, growing China smallcaps trade for well below book value. Do some DD on MYST.OB, ALIF.OB, LPIH.OB, CYXN.OB... Western money is still staying away despite GS upgrades... for how long?

2009 May 21 11:22 AM

[odin]

This is exactly the point.

While quantity (esp. obtained at a cheap price) can make up some of the shortfall, quality still matters a lot.

The perception that BOTH quality and quantity of graduates is high comes from the fact most of the Indian and Chinese graduates the west encounters are the best and the brightest.

However, in both those countries, because of the competitive job market, having a advanced degree becomes the equivalent of having a HS degree here. It doesnt matter what you know, you need to have the paper credentials (from someone...anyone). Hence the proliferation of low-tier educational institutions that will grant vast amount of degrees. Students (with ability and will) are not the only input in producing high quality graduates. You need other resources as well, which are still lacking.

It will continue to get better, but the myth that there are simply hordes of Indian/Chinese graduates waiting to compete with western grads is simply not true. (However, it is true that a large majority of grads in western institutions do come from abroad--usually the best & brightest--but generally, they add to the workpool in their adopted countries rather than their native lands.)



On May 21 08:56 AM Expat in Tokyo wrote:

> I work and live in Tokyo and have lived here 5 of the last 12 years.
> You are naive to think that every student that graduates in China
> or India have received equivelant educations as American students.
>
>
> I am an engineer manager and have been for 15 years. Only around
> 25-30% of the Chinese engineers are equivilent to US engineering
> graduates They are getting better every year. But the vast majority
> are not nearly as productive as the US or Japanese engineers. Their
> schools as are not as good as US and Western universities and will
> not be for a while. The Indian technical schools are good, but they
> are few in number.
>
> With that fact base on my experience in Asia there still are a heck
> of lot of Chinese and Indian graduates each year.
>
> So the American technical workforce is still the world's best overall
> and will remain so for the next 25 years. Yes, the rest of the world
> is gaining but not anywhere near the rate that many people prophetize
> - who only look at the raw numbers of students!

2009 May 21 12:23 PM

[HaavBline]

The author has recognized a major current. Yet this current is not yet main stream.

The best and brightest students continue to come to US for higher learning in large quantity, and most of them continue to prefer to stay and most still manage to do so.

For these people, the decision used to be a very simple one. The US used to offer both better career opportunities and far better quality of life. Now we still offer much better quality of life, but the best career options for these young, talented and ambitious people often lie elsewhere.

2009 May 21 01:33 PM

[bnme]

We may still have the best universities here in the West (though this gap will probably close quickly), but the elementary and secondary school systems in North America in particular are falling apart. In my opinion, that's the biggest issue.

We need to have a public education system where our citizens' kids can be competitive and set for university education.

2009 May 21 03:19 PM

[thinking ahead]

re: "Their American counterparts have seen life as a perpetual spring break interrupted by brief episodes of work..."

Your lazy US student/worker image is specious. Everybody I know in America has been working their butts off for the past 25 years, and that includes most students. Statistics regarding our average national workweek and annual vacation days confirm this. Your own situation may be different.

2009 May 21 04:29 PM

[Chief Illiniwek]

Joe,
I write a weekly investment column and would like to use part of your well versed comment - maybe some of the native born will get the poicture.
Chief Illiniwek
[e-mail]


On May 21 11:14 AM Joe Bruin wrote:

> I agree with most of the points in this article. However, I would
> argue that America has one huge advantage that these other countries
> do not have. I am an immigrant, by the way.
>
> America will continue to attract people because there is social mobility.
> America doesn't care where you came from or how you look like. If
> you study and get get good grades you will have the opportunity to
> attend a good university even if you are poor. It would be impossible
> for a poor kid from India, China or any other developing country
> to accomplish this task.
>
> I know this first hand because I put myself through college. My parents
> paid for a 50 cc Honda scooter, a computer, and one month rent during
> my college years. I worked part time during the school year and full
> time during the summer. It took me five years to graduate from UCLA.
> I graduated with $0 debt. I seriously doubt that I am the only person
> who has been able to climb the social latter.
>
> Social mobility is so important to a country and its economy. Talent
> should always be allowed to grow no matter it's form - race, sex,
> height, financial worth. You can take me as an example. I now work
> as a application/web developer. I can create any web site or desktop
> application that a company may need. I contribute to the tax base
> and to American society. I still dream of having my own company that
> will employ other Americans.
>
> Thanks for reading and God bless America, land of the brave and free.

2009 May 21 11:55 PM

[bricki]

One flaw in the standard comparisons of students across nations is that they generally only report median or average numbers. If you compare the distributions you quickly find that the American distribution is very broad - the top decile of American students is as good if not better than any in the world. The negative is also true, unfortunately America does not work very well for its bottom tier.

Couple that elite with a system that even under current stress is more rewarding to personal excellence than any other and you have the seeds for achievement for a long time to come.

I used to work for a British immigrant - a top scientist who was of Cockney extraction. He loved living and working in the US because nobody here cared about his accent or that he didn't have the right social connections. And he would marvel that people did not judge you by the clothes you wore. The social mobility factor is not to be underestimated. It is a powerful issue in many places.

Now we have a President who is not a white man. Regardless of what you might think of his politics this sends a VERY powerful message to the rest of the world about the openness of American opportunity.

Another important thing to consider is that the H1B program has significant issues in that it is used as a crutch to avoid investment in America's educational system. Yes you want well educated professionals from abroad. But you don't want to do that at the expense of discouraging local citizens from pursuing the training that will get them to that level. I've personally seen that happen in the software development field. It got so bad that American universities were cutting faculty in this field while at the same time companies were complaining about talent shortage.

Immigration preference for talent has to be done for the highest level people. The true leaders. And for people holding advanced degrees who are the source of talent for raising the level of your educational system like my Cockney friend. But you have to be careful to not discourage the development of strong educational institutions by importing people for relatively lower level work when there is opportunity to develop that from within.

2009 May 21 11:58 PM

[beijingpaddy]

The USSR used to boast that they had the most, PhDs, engineers, medical doctors and rocket scientists in the world. RIP. Quantity is often not as good as quality. US schools are better, teachers are better, the entire education system better. No contest with China where the student’s one and only goal is to pass tests, especially the key ones. Great for learning how to pass a test, terrible for learning how to get things done in the workplace. But what they lack in these areas they make up in determination, the ability to work collectively as a nation towards the goal of development, a no thrills but efficient government system, and a stable foundation as the oldest surviving intact culture on the planet.

The world is a terribly interesting place, isn’t it? If we can all figure out how to work together with each contributing our unique national strong points, what a wonderful place it would be. Imagine all the people……….

2009 May 22 03:16 AM

[Danny Furman]

don't confuse your small circle of success with a nation. nice vague, made up stats as well.


On May 21 04:29 PM thinking ahead wrote:

> re: "Their American counterparts have seen life as a perpetual spring
> break interrupted by brief episodes of work..."
>
> Your lazy US student/worker image is specious. Everybody I know in
> America has been working their butts off for the past 25 years, and
> that includes most students. Statistics regarding our average national
> workweek and annual vacation days confirm this. Your own situation
> may be different.

2009 May 22 09:26 AM

[Yoon Kim]

If you want a true comparison of the markets, start the comparison from the common turning point back in October 2007 instead of using Yahoo's default 1 year range. You will see that S&P500 still leads by ~15% over Shanghai index.

In regards to quality of students and workers, an average Chindian might fare better against an average American, but the truely exceptional world class talents are in America and they will be the ones creating real wealth in terms of technological innovation. Strong work ethic is no match for raw brain power driven by real passion with appetite for risk taking.

2009 May 22 10:33 AM