Chinese officials are concerned about future developments in their country. As a result of some labor shortages and rising wages in the low-end labor intensive manufacturing sector, some managers are moving parts of their production out of China to lower-cost countries such as Vietnam. This of course raises the question of unemployment in the export-oriented area which, combined with inflation, could result in social turmoil and labor unrest, if it’s not well-managed. One positive aspect is that the Chinese government recognizes the issues and addresses many of them in their new Five-Year Plan.
China’s 12th Five-Year Plan adopted in March of 2011 includes a program to shift away from its reliance on cheap exports towards greater domestic consumption. This will hopefully help to correct the trade imbalances that have developed, which are a concern to the global community, although China now dominates in so many consumer goods areas and increasingly in technical products that a stronger renminbi could result in even greater trade imbalances, at least in the short-term, since buyers have no other source of supply. The Plan calls for improvement in 12 areas: (1) growing its services such as insurance, banking, retail trade, etc.; (2) improving its industries with emphasis on added value; (3) encouraging local innovation; (4) relying less on global demand and policies; (5) reducing trade friction by increasing imports; (6) reducing the portion of investment devoted to government fixed asset investment; (7) addressing the environment to prevent further environmental degradation; (8) improving energy efficiency and thereby limiting energy demand; (9) ensuring better distribution of wealth from future economic growth; (10) preventing labor unrest by addressing workers’ rights and better union representation; (11) ensuring that citizen complaints about housing, health care, education and other areas are addressed; and (12) reducing regional disparities.
I’m saddened by the devastation and the lives lost in Japan as a result of the massive earthquake, tsunami and multiple aftershocks. I worked in Japan during the 1960s and have been visiting the country at least on an annual basis to meet with clients, even though our emerging markets-focused portfolios do not invest directly in Japan. Living on a fault line, many Japanese people have experience with disaster drills to prepare for such natural disasters. If there’s one thing that I’m confident of, it is the ability of the Japanese people to bounce back from this disaster, as evidenced by their quick recovery after the 1995 Kobe earthquake, which occurred in a more economically vibrant area.
The fiscal stimulus package to get the Japanese economy back on track is expected to be much bigger than that for the Kobe earthquake. Although Japan has a large fiscal deficit, unlike the U.S. or European countries, it also has one of the largest foreign reserves in the world, second only to China at almost US$1 trillion. Most of the Japanese debt is also domestically funded.
Over the past few months, the world’s attention has focused on events in the Middle East and North Africa (MENA), as the uprising that began in Tunisia spread to Egypt and onward to a number of countries in the region. The widening conflicts were quickly reflected in CDS (credit default swaps) spreads widening in those countries and the decline or closure of regional stock markets. Although we do not have investments in Libya, when I see what is happening there, I worry about the safety of innocent citizens. I’m encouraged by the determination of many Libyans who are fighting for more freedom and an opportunity to more fully share in their country’s economic future.
The upheavals in Tunisia, Egypt and other countries can be attributed to a complex of variables, most important of which are rising food prices, unemployment, corruption and political stagnation. Unemployment has stayed high and, more crucially, waves of new young job seekers entering the labor market have not been absorbed. As in many emerging markets, the populations in MENA countries are young—approximately one-fifth are between the ages of 15 and 24.
It’s been a while since I answered some readers’ questions. Thank you, readers, for all your responses to the blog—they have been highly encouraging.
What are your main criteria when picking a sector and the company in a particular sector?
— Tolga, Turkey
Firstly, we do not pick sectors or countries. Our focus first and foremost is on individual stocks and it does not matter which sector or country they may be in. There are many opportunities in various sectors and it would be very limiting if we were to restrict ourselves. Our main criteria to pick stocks include profitability and long-term growth prospects. Our objective is to find companies that our research shows to be underpriced by the market but have the potential to grow in value over a span of about five years.
There will always be unforeseen factors and circumstances that might become catalysts for greater changes in the global landscape, as we have seen from the current unrests in the Middle East. No one knows what will happen in the future, but below is some of what I envision for the emerging markets landscape in the next decade.
Greater Dominance in Global Economy: I believe that emerging stock markets could be much larger than they are today and in the next decade their combined value could exceed the combined value of the U.S., Japanese and European equity markets. Emerging markets have come a long way since 1986, when the International Finance Corporation (IFC), a World Bank subsidiary, started to make efforts to promote capital market development in less developed countries. Since then, emerging countries have progressed from being simply low-cost manufacturing economies to growth-driven economies with a very strong consumer base. The importance of domestic demand in emerging countries will play an even more important role in the future as growth in developed markets is expected to be much lower, fraught with fiscal challenges. With emerging markets, growth in domestic consumption should be driven by, and hopefully sustained, in two ways: rising per capita income and, more importantly, the maturing of the young, working population who will be reaching the most productive years of their lives. However, if governments fail to keep up with this new and rising middle-consumer class, e.g. through a lack of employment and high unproductive government spending that could in turn lead to inflation, this could lead to political instability, a persistent poverty trap and a widening gap between the rich and the poor.