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Steven Kim is a pathfinder with broad experience in vanguard business and financial strategy. He helps people to plan for growth in a global marketplace. The methods employed range from conceptual frameworks for long-range planning to online tools for speedy productivity. The fields of... More
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  • Heyday of the Tiger: Last Hurrah before Korea Yields to China
    As the global economy shakes off the worst recession in modern history, a host of observers have noted the resilience of Asia in general and Korea in particular. According to common perception, the economic tiger is roaring once more and has been leaping from strength to strength.

    If truth be told, though, the reality is a bit more complex than that. As in centuries past, Korea is now caught in a pincer movement between the goliaths of China and Japan. Due to the squeeze from both sides, the tiger’s presence on the global stage will continue to lose its mojo over the years to come.

    Granted, the slippage of the Asian tiger down the ranks is not inevitable. A ray of hope lies in the efforts of policymakers to bolster the local economy by reshaping the patterns of commercial activity and economic output.

    The leading lights in Korea have joined their peers in mid-tech nations around the globe – ranging from Singapore and Malaysia to Latvia and Slovakia – in the call to move up the ladder of creativity and focus on high value-added services. The product lines on the agenda span the gamut from robotic hardware and nanotech compounds to financial services and medical tourism.

    On the downside, though, the plans cooked up thus far have been squarely pedestrian and unremarkable. As a result, the initiatives on the table will not enable the nation to keep its position in the front ranks among the trading nations of the world.

    Given this backdrop, the future looks cloudy for Korea. Even so, the morrow need not turn out to be bleak.

    With a hefty dose of creative effort and a hearty commitment to wholesale change, the prospects downstream could look more cheery. In this sense, at least, Korea is no different from other mid-tier countries around the world.

    If the tiger is to remain in the big leagues in the global forum, it will have to alter its stripes in a sweeping fashion. Sadly, though, transforming a lumbering tiger into a nimble fox is easier said than done.

    In that case, the golden age of the dynamo will be on its last legs. The way things are going, the Korean tiger is slated to slide into the twilight starting in the late 2010s.


    Fresh Start

    The financial crisis of 2008 and the global recession in its wake dealt a sharp blow to prosperity. On the upside, though, the stalwarts of Asia did not take long to bounce back from the drubbing.

    In the absence of further bombshells, the recovery is set to continue apace all across the planet. Amid the general upswing in Asia, the Korean tiger is riding high on the groundswell of economic expansion.

    On the downside, though, the comeback of the 2010s could well turn out to be the last big splash for the dynamo. After that stage, the fireball is destined to slip down the ranks among the exporting giants of the world.


    Enter the Dragon

    In the years to come, Korean firms will struggle mightily to hold their own against the onslaught of firebrands in emerging nations. Of all the spunky upstarts, the toughest troupe of competitors is sure to come out of China.

    Within the past decade, the Middle Kingdom has proven beyond doubt that it can stamp out products to world-class standards. A case in point is the takeover of an American icon.

    In 2003, Legend Computer Group of China came up with the Lenovo logo as the banner for a worldwide strategy. A couple of years later, the usurper bought up the entire PC division at IBM. After taking over the brand, the company moved its administrative headquarters to the U.S. as a token of the firm’s newborn status as a global player.

    Since the autumn of the 20th century, a lot of people around the world have gotten the impression that Korea is a powerhouse of technical innovation. The spectators who subscribe to this view, however, have failed to grasp the nitty-gritty that lies beneath the patina of success.

    The truth of the matter is that Korean firms are adept at taking foreign technologies and bundling them up into commercial products. A case in point is the lineup of mobile phones sold round the world by Samsung Electronics.

    The heart and brain for this type of gadget is the microchip that makes sense of the complex blips of electromagnetic waves. As it happens, the software recipe and hardware design for mobile telephony are crafted and refined in the U.S. In fact, the chip itself is produced by the likes of Qualcomm, an American pioneer in wireless signaling.

    Looking at the cellphone from the outside, the casing is built out of workaday materiel and equipment for molding polymers. Since the technology is nothing fancy, the shell can be readily stamped out by small or midsize firms in Korea.

    For this reason, Samsung has scant reason to build its own factories and suffer the high cost of overhead for any gigantic firm. Rather, the marketer buys the shell from smallish contractors in order to take advantage of their lean operations along with the cost savings.

    In line with this example, Korean firms are good at taking breakouts forged elsewhere and packaging them into salable products. This approach has worked wonders since the 1960s. The tiger has followed in the footsteps of trailblazers such as Japan in order to establish a towering position as a global exporter.

    In addition, the low cost of labor served Korea well during the first couple of decades. Unfortunately, income levels soared during the 1980s and have been creeping even higher in spite of minor reversals from time to time. Due to the hefty level of wages along with the dearth of proprietary technology, the country no longer has any competitive advantage to speak of in relation to its toughest rivals.
     
    For these reasons, the weathered strategy of adapt-and-export is losing its mettle and will begin to falter in the years to come. The main problem for Korea is that other nations such as China and India are fully capable of pursuing a similar tack.

    Against this backdrop, an article in the Economist has hit the problem on its head.1
    In computer chips, Samsung Electronics is comfortably ahead of China for now. But the skills needed in that business are described by one Samsung expert as like running a “digital sashimi shop”—the trick is to get products so swiftly to market that they do not lose their freshness. There is no inherent reason why Chinese firms cannot eventually catch up. What is more . . . . China is more open to imports and foreign direct investment than South Korea, which helps China’s quest for intellectual property.

    On the upside, the article noted above happens to be more perceptive than the vast majority of commentary in the business press regarding the prospects for Korean firms.

    On a negative note, though, the piece does have room for improvement. The shortfall lies in the perceived level of urgency – or lack of such – for Korean industry.

    The gist of the article could be summed by the word “eventually”. Yes, the dragon could catch up in due course, but Samsung is seen to be “comfortably ahead of China for now”. In that case, there’s no need to sweat for the time being.

    Based on this mindset, the article takes a bemused look at the apparent urgency by the top brass at Samsung. The authorship is unaware that “eventually” ought to be replaced by “soon”. The takeover by the Chinese dragon looms in the near distance, on the order of a few years rather than a couple of decades.

    In the tussle against China, a big snag for Korea is the huge difference in the pool of talent. Thanks to its immense population, the rising dragon boasts a far larger supply of able engineers. In addition, the cost of labor on the mainland is still much lower than that on the peninsula.

    In the years to come, the dragon will not only steal the tiger’s thunder, but eat his lunch as well. On current trends, China is poised to overtake Korea in one industry after another as the decade wears on.


    Regaining Traction

    Along with the rest of the world, Korea has been recovering at a respectable pace after the financial flap of 2008 and its aftermath. The vigor of the Korean economy is highlighted by the resilience of the housing sector.

    By the beginning of 2010, the average price of real estate in Korea had recovered fully from its drop during the global recession. Moreover, the housing market could well rise at an average pace of 7% or more for much of the coming decade.

    In addition, the stock market as well as the local currency have been climbing back from their flops at a decent pace. The chart below shows the relative performance of the Korean Stock Price Index (KOSPI) over the past 5 years.

     Relative performance of the Korean stock market and currency.


    On the diagram – which has been adapted from Yahoo Finance (finance.yahoo.com) – the market benchmark appears as the buoyant curve shown in blue. The chart reflects the fact that the bourse has managed to recoup the bulk of the losses suffered in the deluge before, during and after the financial crisis of 2008.

    By contrast, the Korean won has not recovered as strongly from its tumble. The likely cause of the weaker recovery for the currency lies in the skittishness of international investors.

    More precisely, the stock market has been clambering upward as local citizens start to pile back into the bourse. On the other hand, foreign investors are still wary of returning to the Korean market in force. The muted level of enthusiasm translates into a labored recovery for the local currency.

    The relative strength of the Korean won with respect to the U.S. dollar is portrayed on the same chart as the KOSPI benchmark. The path of the currency is denoted by the green line.

    In the years to come, we can expect the stock market to clamber a good deal higher. The same is true of the Korean won.

    As it happens, the KOSPI benchmark has not performed as well as it should have over the past decade. This viewpoint takes into account a variety of driving forces: the growth of the domestic economy, the rise in income for the local population, the efforts of the government to shore up the bourse, the demand for Asian stocks by international investors, and so on.

    Given this backdrop, the KOSPI index is likely to make up for lost time over the next few years. Prior to the financial crisis, the index had reached a peak of 2,085 points in late 2007. At the moment, the benchmark hovers around 1700 or so.

    For the reasons given above, the market could surge ahead over the years to come. One prospective outcome is a peak of 3,000 or even higher before the next bombshell hits the market and pummels the index once more.

    Long before the blowout, the local currency is also likely to rise above its prior peak from 2007. At that juncture, Korean residents will find that foreign assets seem a lot cheaper than they have been since the mid-1990s. As a result, we can expect a gush of funds to flow out of the country and make their way to emerging markets as well as mature regions.


    Final Roar

    In line with the historical norm, Korea is caught nowadays in a vise between the juggernauts of Japan and China. For this reason, the tiger’s roar on the global stage will weaken over the years to come.

    Granted, Korea’s relative decline as a trading giant is not entirely inevitable. The main counterpoint is the effort of policymakers to uplift the local economy by reshaping the product mix.

    As an example, Korea has joined the parade of mid-tech nations around the globe in their attempt to move up the ladder of ingenuity and specialize in high value-added services. The targets in sight span the gamut from nanotech products and financial services to smart software and medical tourism.

    On the downside, though, the plans cooked up thus far have been humdrum and colorless. As a result, the initiatives on the agenda will not enable the nation to retain its spot in the front ranks of the global forum.

    While the future looks cloudy, it need not be dismal. With a large dose of creative effort and a serious commitment to radical change, the morrow could shine more brightly for the wheezing tiger. In that aspect, at least, Korea is no different from other mid-tier countries.

    On the downside, though, the nation has shown scant evidence that it can embrace the wholesale changes required for a thorough makeover. Over the past decade and more, policymakers have exhorted the captains of industry to change their stripes and take to heart creativity of the disruptive kind.

    Like so many other cultures, Koreans want to eat their cake and keep it too. The denizens make loud claims about the need to make sweeping changes, but few are willing to put in the effort required to throw out the old ways and usher in the new.

    The standard operating procedures in place today were set up during the industrial age, when the nation could simply follow in the footsteps of the spearheads in the global forum. Sadly, though, the game of catch-up gets harder to play when the incumbent is chased by youthful rivals starting from lower rungs on the ladder of technology.

    If Korea is to hold its ground in the markets of the world, then the nation will have to change its customs big time. Unfortunately, converting a lumbering tiger into a nimble fox is easier said than done.
     
    In that case, the golden age of the dynamo will be on its last legs. In fact, the twilight is destined to encroach on Korea by the latter part of this very decade.


    Reference

    1 Economist, The.  “Return of the Overlord”.  2010/3/31. www.economist.com/world/asia/displaystor... – tapped 2010/4/20.



    Disclosure: N/A.
    Apr 20 4:23 AM | Link | Comment!
  • Global Recovery and Risk of Double-Dip Recession

    The global economy continues to recover from the worst recession since the Great Depression of the 1930s. A prime indicator is the volume of world trade. The value of exports in emerging countries rose by 8.7% during the last 3 months of 2009, although the corresponding rate in developed nations was less than half that level.

     

    Despite of the increase, though, the value of world trade remains well below its prior peak. According to the World Bank, the volume of trade at the end of 2009 was 30% higher than the trough reached in February the same year. Even so, the traffic was 30% lower than the figure prior to the financial crisis that flared up the previous year (Economist, 2010).

     

     A bellwether of global trade is the cost of shipping dry goods overseas. The standard bearer in the field is the Baltic Dry Index (BDI): a composite price for oceangoing freight compiled by the Baltic Exchange, a trade group based in London.

     

    After falling off a cliff in 2008, the BDI has been clambering upward in fits and starts:

     

    Baltic Dry Index

     

    The figure above (adapted from Bloomberg), suggests that there is no particular need for worry as far as worldwide trade is concerned.

     

     

    Specter of a Follow-up Recession

     

    A popular concern in the business press is the bugaboo of a second meltdown in the global economy. The pundits like to point out that the recovery over the past year was driven by the massive outlay of public expenditures. As the impact of the stimulus packages wears out, the economy could run out of steam in 2010.

     

    Another concern is the lousy state of public finances. The overhang of budget deficits besets countries ranging from Ukraine and Greece to Ireland and Iceland.

     

    According to the gurus, the takedown of credit ratings for sovereign debt and the collapse of any currency would terrify investors. Another outturn would be a disruption of international trade. Amid the fracas, the global economy would collapse once more.

     

    Admittedly, the specters on the horizon could come to pass. On the other hand, the damage is unlikely to be severe.

     

    On one hand, the stimulus packages unleashed last year will of course wind down. Even so, the sturdy growth of emerging nations such as China, India and Brazil should take up a great deal of any slack in production and consumption within the mature economies.

     

    Meanwhile, the risk of sovereign defaults and currency collapses is restricted largely to small countries. Even in the case of the regional euro, many of the economies in Central and Northern Europe – including the juggernaut of Germany – are for the most part in decent shape.

     

    The collapse of the financial markets in the wobbly countries would certainly clobber the local economies. On the other hand, there is no good reason for a regional upset to pulverize the economy throughout the globe.

     

    In 2009, the severity of the Great Recession stemmed from the massive uptake of leverage in mortgage-based derivatives and other ill-formed schemes over the previous half-decade. When the housing bubble popped, the outcome should have been a vanilla-flavored recession. However, we ended up with a monster crash in the financial forum and the real economy due to the sudden unraveling of the extreme pileup of leverage.

     

    These days, though, the mountain of leverage has largely been cleared away. It will take half a decade or more before the lessons of mindless risk are forgotten and the global markets find themselves perched on a precipice of comparable height.

     

    In the absence of loony amounts of leverage, any recession to come will likely be a garden-variety version. As a result, the takedown is apt to be short and shallow.

     

    To sum up, the problems on the horizon are unlikely to lead to any serious injury to the entire population of investors, consumer and producers around the planet. Any flaps on the horizon should be minor compared to the ordeal we suffered through over the past year and a half.

     

    Mar 05 6:03 AM | Link | Comment!
  • Stock Market Index is a Phony: Why an Investment Strategy Usually Flops
    A striking feature of the financial forum is the inability of the average investor to iron out an investment strategy that can keep up with the stock market index of choice. Although the reasons for the failure are multiplex, we will focus here on one factor that has escaped public scrutiny thus far: the benchmark is not what it seems.

    According to common perception, a market index is a neutral yardstick that measures the performance of the bourse as a whole. In truth, though, the popular view happens to be wrong.

    Admittedly, the image of the benchmark could agree with the reality in certain cases on certain occasions. As an example, the average price for the entire ensemble of stocks in a particular industry could be a trusty measure of the market segment over the course of a few moments or even the span of several months.

    On the other hand, none of the benchmarks used by the financial community provides an accurate view of the market as a whole over longer periods. This shortfall lies at the root of the curio in which the average investor cannot keep up with the market averages.


    Mistaken Identity

    In the eyes of the general public as well as the financial media, a benchmark is a representative gauge of the behavior of the overall market. This perception is illustrated by the usual description of an index fund designed to match the performance of a benchmark. In particular, a pool of this sort is presented as a passive vehicle as if it requires no intervention by the custodians.

    In reality, though, the popular viewpoint stems from a misconception of the nature of a benchmark. To begin with, a market index is rarely – if ever – an index of the entire marketplace. Rather, the yardstick is wont to tally only the stalwarts in the forum.

    As an example, the Dow Jones Industrial Average covers just 30 of the largest and stoutest firms in the arena. Meanwhile, the popular version of the S&P index used by the financial community contains merely 500 of the biggest firms listed on the bourse.

    Given this backdrop, the term “market index” is in fact a misnomer. Instead, an alternative moniker such as “elite index” would be more in tune with the reality.

    On one hand, the number of stocks covered by a benchmark is apt to remain fixed over time. On the other hand, the names on the roll call come and go in line with their performance in the forum.

    For this reason, the benchmark today is not the same object that it was in the past. To say that one batch of players is identical to another simply because the two sets happen to contain the same number of members is a sheer flight of fancy.

    To underscore this point, we will take up a simple example from everyday life. In the process, we will show how the same logic could be applied to a bunch of groceries to come up with ludicrous results.


    Fruits Can Outrun Stocks

    For our showcase, we will consider a basket containing a dozen vegetables. Suppose that the batch has a combined value of $1.20. In that case, the average price of the vittles comes out to 10 cents. Based on the latter figure, we will assign the value of 10 points to denote the level of the price index for the entire basket.

    As the days go by, the veggies in the basket will begin to wilt and shrivel. Whenever an item in the batch has passed its peak of freshness, it is thrown out and replaced by a brand-new selection from the grocery store.

    As an example, a mushy tomato might make way for a green banana of equal value. In a similar way, a bag of peas could be switched out for a bunch of grapes.

    With the passage of time, one after another of the original set of vittles is discarded and replaced by an up-and-coming piece of fruit. After a week or two, none of the initial goods remains in the basket. Rather, the whole batch ends up consisting entirely of fruits at varying degrees of freshness.

    In addition, the new entrants gain in value as they ripen over time. As a result, the basket rises in value to $2.40 as the days go by. In other words, the average price of the vittles comes out to 20 cents. In that case, the index of the basket turns out to be 20 points.

    Put another way, the value of the basket has doubled in value within a couple of weeks! Holy cow – everyone ought to load up on groceries as a way to boost their wealth.

    If the mass media and the general public were to use the same approach in dealing with the bundle of groceries as they do with a basket of stocks, they would go wild with excitement. Groceries have doubled in value within a couple of weeks! Buy food now!!  Get rich QUICK!!!  The road to wealth leads to your grocery store….


    Crux of a Stock Market Index

    A benchmark of the bourse is propelled upward by an endless stream of sturdy stocks. Like a relay race, a sprightly entrant takes over the baton each time a spent player drops out of the running.

    In this way, the yardstick rides on a constant stream of newfound energy. In fact, the benchmark is designed to represent the combined strength of the stalwarts in the prime of their lives. For this reason, the conventional yardsticks of the forum do not come close to reflecting the fortunes of the entire field of stocks.

    In this milieu, the only way that the investor can match the performance of the index is to replicate the process in toto. In particular, the gamer has to resort to the same scheme of endless renewal of stocks in the portfolio.

    On the other hand, the majority of investors have neither the time nor the desire to keep tabs on the bourse without letup. Nor do they have the patience to figure out whether a downstroke for each stock is just a temporary setback or the first step in a secular decline. In addition, most folks have neither the training nor inclination to do a thorough job of scouring the entire population of stocks in order to pick out the most promising candidates to serve as replacements for the washouts in the portfolio.


    Losers Galore

    Against this backdrop, it's not surprising that the majority of individual investors and commercial outfits are unable to keep up with the market benchmarks. The investment vehicles in this predicament include mutual funds as well as hedge funds.

    If full-time professionals on average lack the savvy to keep up with a stock market index, what hope is there for part-time investors? It’s no wonder that the average investor lags the market benchmarks.

    All that is the bad news. Amid the thicket of gloom and doom, though, there is a sliver of light and cheer.


    Keeping up with a Stock Market Index

    On the upside, there are straightforward ways to match the performance of a market benchmark. The simplest of these schemes is to buy a batch of shares in an index fund designed for the purpose.

    Granted, the ability of an index fund to keep up with the target yardstick might not be perfect. One reason for the discrepancy stems from the administrative cost of running the pool. However, the usual fee each year is only a small fraction of 1% of the total value of assets under management.

    In that case, an index fund should be able to match the course of the benchmark within a nominal fraction of a single percent. The level of performance is wont to be good enough for all practical purposes.


    Roundup for Investment Strategy

    To sum up, a benchmark of the stock market is presented as if it represents the bourse as a whole. In practice, however, the yardstick does not cover the entire field of stocks.

    In addition, the index is a cagey structure that flits from one set of stocks to another depending on the vicissitudes of the marketplace. More precisely, the custodians of the benchmark throw out the laggards and replace them with pacers on a continual basis. For this reason, a telling term for a market yardstick would an “elite index. Moreover, the performance of the team is driven by a relay race rather than a fixed group of stocks.

    One of the wacky consequences of the biased scheme is the propensity of a benchmark to clamber upward regardless of the behavior of the market in general. The positive bent comes from the practice of switching out the deadbeats with the upstarts on the ascendant.

    As a result, the yardstick is apt to rise even if the market as a whole happens to go nowhere. In fact, the benchmark could advance at times even if the bourse at large were to decline.

    The situation is analogous to a bundle of veggies whose value keeps growing indefinitely. Even if the cost of groceries happens to remain stable, the continual replenishment of vittles as they ripen and gain in value could drive up the price of the basket over time.

    In this setting, it’s hardly surprising that the vast majority of players in the forum are unable to keep up with the benchmarks of the bourse. Pratfall is the norm whether the participants happen to be part-time amateurs or full-time pros.

    In spite of the dismal news from the financial front, though, there is a simple fix to the stumper for legions of gamers who want to get out of the rut. By turning to an index fund, an investor can largely keep up with a target benchmark and thereby beat out the bulk of contenders in the arena.

    To top it off, the wily player can attain the uncommon feat of matching the benchmark without spending any time or effort in updating the portfolio or even keeping tabs on the marketplace. For the vast majority of investors, the best approach to investment strategy is as simple as can be: buying into a fund designed to keep up with a stock market index. 

    Oct 26 3:07 PM | Link | Comment!
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