Beijing Forbidden City, former imperial palace of the Qing Dynasty
I attended a Franklin Templeton client conference in Vietnam in August and had the opportunity to meet a special guest speaker for the event, Li Cunxin, the author of the book Mao’s Last Dancer. Li grew up in China during the Cultural Revolution where he and his family had to endure poverty and hardships, getting by with having dried yams for each meal. He was lucky to be selected from thousands of children to join Mao’s wife’s ballet group. Again he had to undergo tough training but emerged as a lead dancer, and then with phenomenal success as a principal dancer on the world stage. Now he lives in Australia with his Australian wife and children. Since retiring from dancing, he has become a stock broker and an international motivational speaker.
Li’s success is reflective of China’s rise as an economic heavyweight. The country recently became the world’s second largest economy and is projected to overtake the U.S. as the largest economy in the world as early as 2030, if current growth trends continue.
I have been living in Hong Kong since the 1960s and, like Li, have witnessed the tremendous changes in the daily lives of people in China. Today, millions of Chinese have refrigerators, washing machines, mobile phones and other electronic appliances in their households – unheard of during the years of the Cultural Revolution. And the nation of bicycle-riders has turned into one of fervent car owners, with more than 1.2 million cars sold in China every month, surpassing U.S. domestic car sales.
I continue to believe the investment prospects and long-term outlook for China are excellent for a number of reasons. In my opinion, the reason for China’s economic success is really because of the Chinese people: (1) Chinese leadership is intelligent, resourceful and enlightened, with an interest in maintaining growth with a better standard of living for all Chinese; (2) that leadership has the organizational skills and policies capable of ensuring that China continues to achieve the highest GDP growth of any major country in the world; (3) China has the financial resources to undertake this gargantuan task with the world’s largest store of foreign reserves; (4) China has one of the healthiest banking systems in the world, where most individuals have little borrowings; and (5) investments in infrastructure continue to boom, contributing to future competitiveness.
Last week, I penned down some thoughts about Japan after a recent trip to Tokyo and I wanted to continue on that train of thought…
Mark outside the Otsuka museum.
After my stop in Tokyo, we headed to Osaka, where we drove across the world’s longest suspension bridge – the famous US$5 billion Akashi Kaikyō Suspension Bridge spanning 3,911 meters in length. Rising 66 meters over the water, the bridge took over 10 years to build and was completed in 1998. The construction challenges were enormous since the bridge had to be designed to withstand for winds of up to 286 kilometer per hour and earthquakes up to 8.5 on the Richter scale. In fact, while construction is underway the Kobe earthquake of 1995 occurred. The Akashi Kaikyō Bridge is one of Japan’s greatest engineering feats, pushing the limits of technology at that time. It is a reflection of the Japanese’s brilliance, determination and perseverance – key factors that would be crucial in helping to turn the economy around.
And as I mentioned in my previous blog, Japan faces many economic challenges before it can make a comeback – I talked about exports and the macro-economic picture last week. So let’s look more closely at the domestic situation – Japan’s immigration policy needs to loosen up to help lower labor costs. In addition, the government needs to reduce spending and taxation so that local small and medium sized enterprises can grow by expanding into the rest of Asia and to business in places like China, India and Indonesia. That’s because small and medium sized enterprises are a crucial part of the economy that help to create new business and enterprises. In order for those to flourish, there’s a need to reduce the role of the government in the Japanese economy.
On a recent trip to Japan, I stopped in Tokyo and one of the questions that journalists often asked me was why Japan was lagging behind its Asian neighbors? With the spotlight on sluggish growth in developed economies, it seems that everyone is back to moaning and groaning about the Japanese economy. A modest 3% GDP growth is expected in Japan this year, compared to a disastrous 5% shrinkage of the economy in 2009. Japanese exporters say they are hurting from a strong Yen while the importers are having a field day. Back in 1990, one US Dollar bought 155 Yen but now it will buy less than 90 Yen. That’s a big change. Of course when I first worked in Japan in 1960, one US Dollar would buy me 360 Yen! This was around the time when Sir John Templeton first started investing in Japan, then considered an emerging market in Asia.
While it’s true that the Nikkei 225 Index (JPY) has fallen from a high of 25,000 in 1991 to a low now of less than 10,000, bargain hunters would say that this is beginning to make the Japanese stock market look reasonably cheap. The average dividend yield for Japanese company shares is now 2% while the average price/earnings ratio has come down from a 1994 high of over 70x’s to a more attractive 13x’s.The price-to-book value, another measure of value, has retreated from a 1991 high of almost 3x’s to the current lows of 1x’s.
On the heels of the global financial crisis, as Europe discusses the implementation of painful austerity measures and the U.S. deliberates the continuation of expensive government spending, I cannot help but draw attention to the relatively good fiscal health of several emerging market countries. While many investors across the globe continue to think of emerging markets as ‘backward’ compared to developed markets, I think this is somewhat of a misperception based on impressions from decades ago. Per capita income in some emerging markets may still be lower than that in developed markets, however on several other measures, some emerging markets actually look healthier than some developed markets.
In the mid-1990s, some emerging markets substantially relied on foreign financing, making these countries more vulnerable to shifts in foreign expectations and perceptions. Consequently, they experienced serious financial crises, such as in Asia in the late 1990s and in Latin America in the early 2000s. These crises brought sharply into focus the risks and costs associated with underdeveloped domestic markets and excessive reliance on external, foreign-denominated debt.