How do you explain the magic of markets to new investors? IFAs are often stunned at how little is un...
How do you explain the magic of markets to new investors? IFAs are often stunned at how little is understood about what makes the money world go round, and they struggle to find metaphors to describe it. Some talk about cars and engines, others about football teams and strategies
But one of the best I have heard so far is from a seasoned IFA who was presenting to a couple with two young children. "It's like Snap!, Old Maid (two card games) and musical chairs," he said. "You mustn't say 'Snap!' too early or too late, you try to pass your Old Maid on to someone else, and when the music stops, you try to be the one sitting on the chair.
The music has started in Asia again. In fact the place is positively rocking. All the Asian IFC Investable indices except for Sri Lanka are up in dollar terms. Korea has risen by 70%, Indonesia by 63%, India by 53% and China by 51%. Malaysia is nearly 38% higher, Taiwan 37% up and both Pakistan and Thailand are 23% ahead.
The recovery from the crisis sparked by Thailand's surprise devaluation of the baht on 2 July 1997 has been remarkably swift. It has also been uncomfortably uneven and even the most confident international investors, who dared the first wave of the turnaround tide in January, feel that some of the Asian markets have got beyond themselves.
No one can deny that countries such as Thailand, Korea and even Malaysia (in its own way, by introducing exchange controls) responded well to the financial crisis by cutting costs and reforming financial structures and individual companies. In Thailand, foreign investors have been allowed to buy property for the first time. In South Korea, ownership of financial institutions has been opened up and in Singapore banking reforms have been pushed through.
But now the danger is complacency. Short-term interest rates are low, and with the US Federal Reserve's 25 basis point cut last week, fears of a knock-on tightening of monetary policy have eased. Asian exporters will be able to absorb this rate rise. Their currencies are now widely under-valued and are benefiting from the rebalancing of the dollar and the yen. Economic growth is picking up steadily but there is no threat from inflation.
Companies are beginning to lift their heads and look more confidently at the future. In countries such as Singapore, salaries are rising along with car sales. Consumption is picking up, even in Japan, bolstering intra-Asian trade. Companies' earnings growth is following on. But the danger is that these tender shoots of recovery will be taken as a sign that harvest is here again.
There is still much cultivation of rigorous management and corporate accountability to be done. Just because share prices have recovered, the painful process of reform should not be abandoned. The volatility of Asian markets demonstrates how sensitive investor sentiment is to any bad news.
Not to mention politics. Indonesia appears to be breaking up before our eyes and India enters a new election campaign this week in happy chaos. These are the Old Maids of any current Asian portfolio to be unloaded onto anyone who thinks they are a value investor. Be ready to shout "Snap!" if offered almost anything from Singapore and Taiwan. And keep an eye on Hong Kong. Currently out of favour with Western investors, anyone in Asia knows it will take a lot to defeat Hong Kong's business ingenuity. When the millennium music stops, that's the chair to be sitting in.
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