This reprint from today's Global-Investing.com blog omits specific stock
advice which is only provided to subscribers:
It may be the impact of the solar eclipse in China and India today but
there is increased skepticism about emerging market shares.
Jim Rogers jr., my husband's buddy from Balliol College (Oxford) told
Bloomberg today that “China may be ahead of itself” with its fantastic
stock market rally this year. Jim has not bought any more Chinese shares
since last October, the service added. Jim, a former New Yorker who is
raising his young daughters in Singapore so that they can learn Chinese
easily, had been a perma-bull on China for years. Intrepid Jim famously
invests in frontier markets, which he reached in his younger days by
motorcycle, and more recently by a specially equipped yellow car. But he
is growing cautious.
Another emerging markets expert concurs. The spectacular rally in
emerging markets "looks like another bubble in the making" says Robert P.
Smith, author of "Riches Among the Ruins: Adventures in the Dark Corners
of the Global Economy."
Smith, founder of Turan Corp., a Boston firm specializing in trading
emerging markets' currency and sovereign debt, knows how to evaluate
creditor claims against foreign governments. He believes the rally that
brought the MSCI EM Index up almost 70% since early March 2009, is a
bubble. He thinks this is the result of exaggerated expectation of growth
occurring in emerging economies despite depressed consumer demand in
developed countries, particularly in America.
The optimism assumes there will be "decoupling" whereby developing
economies grow independently of those in the developed world. Its
proponents point to the expected growth from China's stimulus program,
which together with an overhaul of the healthcare system, represent over
16% of China's 2008 GDP.
Smith is skeptical that so much money can be quickly spent in an
efficient manner, "much of the stimulus may be going to politically
connected loss-making enterprises and thus will result in no lasting
growth. We may discover in a few months that the rich valuations at which
we now buy EM shares are unsupported by the risk adjusted prospects for
earnings and experience sharp losses."
There are many reasons for caution on China, where we have seriously
lightened up by taking profits lately. The stimulus is all very well, but
China does not have efficient economic controls, and the risk of
inflation is much higher than in developed economies. A reversal of
course, like Ben Bernanke described in the Wall St. Journal yesterday,
would be tougher to implement from Beijing.
Moreover, there is real political risk which worries Beijing as well as
foreign investors. The border tribes are restless along the old silk road
and the mountain fastnesses of Tibet. Making nice with Taiwan is all very
well, but that is not where instability will come from. The ruling pols
made a deal with the country: keep us in power and you will have a better
life. But that can go wrong if the stimulus is reversed.
Revolutions occur not when the populace is miserable, but as a result of
rising expectations, or their frustration.
Chinese demand is certainly boosting commodity prices and raw materials.
I am not sure if this will be enough to pull the world out of its
economic funk. American factories are running at 2/3 of their capacity,
putting people out of work, and it is unlikely that Chinese growth even
at 8% or more this year will fill the gap.
First of all, the match is not very good. What we make is not the raw
materials they want. Secondly, China accounts for about 7% of world GNP.
That means its boosted economy will add at most 0.50% to world output.
That is not much.
We know that Chinese statistics are awful. A large command economy with poor
controls has been mobilized to boost growth. But local party bosses can
massage the numbers to make themselves look better – and they do.
Moreover, leakage from corruption and graft is high. And excess
enthusiasm by the local population (rushing to open brokerage accounts at
the rate of 50,000/day) may not be very positive globally at all.
Skepticism about China is matched by worries about India. Its monsoon
rains are short and the agro-dependent economy may suffer. Higher food
prices hurt poor countries. The solar eclipse is cutting off the sun in
India as well. Bad rains mean a bad wedding season and cheap Diwali
gifts. Gold will not go up, if the rains do not come.
Single-minded focus on emerging Asia is dangerous. Decoupling is unlikely
to come from Latin America either, but at least the long-term secular
trend is up there, despite their greater dependence on US growth. I would
take with a large dose of salt economist Louise Yamada's forecast today
that all emerging markets are in a long-term secular bull market. On the
other hand, I do not buy Bank of Ameerica-Merrill's forecast that you can
make a return of 20% a year in Latin America either.
We put some stops on our China portfolio yesterday. They were not reached
because the stock market is over-focused. China announcing subsidies for
solar power (to sooth the US) got our simplistic speculators to overbuy
Chinese solar stocks to the exclusion of all else.
Stock market hype is dangerous anywhere in the world. Investing wisely
requires thought, examination, pondering news and developments. We remain
interested in investing in the developing world but wary. We are stock
pickers, not trend-players.