Economics – Markets – Strategy” for Asia and the G3.Capital flows have always been a two-way affair. When sentiment is strong, inflows push you up the mountain. When it’s weak, they drag you out to sea. The fact that Western central banks put interest rates on the floor five years ago and kept them there has only amplified the action – first inward, as Asia’s V-shaped recovery took off in 2009 and 2010 and then outward, as the EU debt crisis erupted in 2011 and, more recently, as fears over Fed tapering have grown.
Three steps forward…
We estimate that in the two quarters ending June, some US$138bn flowed out of the Asia-8. Is that a lot? Surprisingly, no. Two years ago, $152bn flowed out when the European debt crisis erupted. When Lehman collapsed five years ago, $350bn left the region, 2.5x more than the current ‘exodus’. QE and its tapering make a sexy story but the fact is today’s outflows rank only third in the standings, and that’s just in the past five years.
If all of this money is flowing out of the region, when does Asia run dry? It doesn’t. Today’s outflows underscore the fact that there have always been two types of inflow: short-run ‘hot’ money flows arbitraging differential rates and returns, and longer-term inflows seeking to profit from Asia’s strong growth. The hot money is now going home – or at least this week it is. The long-term money is staying put. And the long-term money is the bigger force.
Since the dotcom / hi-tech downturn ended in 2001, some $2.4 trillion of capital has flowed into the Asia-10. About $500bn flowed out temporarily in 2008/09 and another $300bn has flowed out since September 2011. Net, net, that’s $1.6trn of long-term capital that has stayed in Asia, riding out the various global crises of the past 12 years. Three steps forward, one step back – for every dollar that comes in, 66 cents stay for the long haul. As capital flows go, that’s a pretty good signal-to-noise ratio.
Why is so much money coming to Asia? That’s easy. Asia is where the world’s growth is being generated. And businesses want to be where the growth is. Think about it: Asia and the US are now about the same size – GDP in both regions is roughly $16 trn. If the US grows at a 2.5% rate, it generates $400bn of new demand each year. But Asia grows at a 6.25% pace, maybe a bit faster. It generates $1000bn of new demand every year. If you’re a businessman, do you want to invest where demand is growing by 4 cents per year or where it’s growing by 10 cents per year?
Extend the thought to Europe. Many are encouraged by the fact that Germany returned to positive growth in the second quarter. That’s good news and a good reason to invest there. But put it in perspective. If Germany grew at a 1.5% rate for the next 47 years – a feat few think it will accomplish – it would double in size. It would ‘add’ a new Germany to Europe’s economic map by 2060. Asia, by contrast, ‘adds’ a new Germany every 4 years, right here in Asia. Five years hence, it will take only 3.5 years for Asia to add a Germany. By 2060, Asia will have put about 25 Germanys on the economic map. Pretty staggering.
This is why long-term capital will continue to flow to Asia. Businesses and investors want to be where the growth is. Inflows will continue to flip-flop in the short-run and yes, Asia will make plenty of mistakes – the West has no monopoly on that. But the shift in economic gravity is the biggest structural change underway in the global economy today. Structural inflows will remain, and grow, long after today’s hot and sexy but ultimately short-term outflows have become a footnote to the bigger picture.
David Carbon, for
DBS Group Research
September 12, 2013
10 biggest stock markets in the World by domestic market capitalization in 2005 (USD bn)
1 NYSE Group 13,632.3
2 Tokyo Stock Exchange 4,572.9
3 Nasdaq Stock Market 3,604
4 London Stock Exchange 3,058.2
5 Euronext 2,706.8
6 Canadian TSX Group 1,482.2
7 Deutsche Börse 1,221.1
8 Hong Kong Exchanges 1,055
9 BME Spanish Exchanges 959.9
10 SWX Swiss Exchange 935.4
As of June 2013
1. NYSE - Remember that it merged with American Stock Exchange and more critically Euronext after 2005. Hence their 2005 base should be 13,632.3 + 2,706.8 = 16,339.1. As of June 2013, its 14,000 which is 85.6%, a loss of 14.4%, largely due to European stocks devastating performance in recent years. (-14.4%)
2. Nasdaq - June 2013 figure was 4,500 compared to 2005 figure of 3,604 ... more reflective of the resilience of the US markets despite the 2008 sub prime debacle. (+24.8%)
3. Tokyo Stock Exchange - Current 3,300 compared to 2005 figure of 4,572.9. Despite the massive surge over the last 12 months, it is still not enough to wipe out the debilitating balance sheet recession from the excesses in the 80s and early 90s. Abe still has to be more aggressive to reverse the course for Japanese stocks. (-28%)
4. London Stock Exchange - Current 3,396 compared to 2005 figure of 3,058.2. Safe to say, Thatcher's insistence not to join the Eurozone has helped in a large way to allow them to rebuild faster than their neighbours. The government over the last 10 years have done sufficiently enough to propel London as a major and viable exchange for the world's biggest companies, thus drawing a large number of international companies to their shores, hence the real figure for UK may be inflated but still significant to compare. (+11%)
5. HK Stock Exchange - Current figure 2,831 compared to 2005 figure of 1,055. Naturally HKSE also continued to benefit from continued listings of red chips from China, still a significant development and trend. (+168%)
6. Shanghai SE - It was not even in the top ten back in 2005 with just 295 bn. Now its at 2,547 bn. Seen in this light, it makes the HKSE figure even more credible. (+763%)
7. Toronto SE - Again, another that was nowhere back in 2005 with 1,144. Its current figure is just over 2,058 bn. Largely they have stayed strong thanks to almost none of their banks participating in the subprime mess. (+80%)
8. Deutsche Bourse - 2005 figure 1,221 and the current figure is 1,486 bn. Germany is already the most resilient among the EU countries so you can imagine how bad it was for the rest. More significantly, even Toronto has overtaken the German bourse in market cap. (+21.7%)
9. Australia SE - Current figure 1,386 bn while the 2005 was around 720. Benefited from huge China investments in commodities and mines, and they were shielded from the subprime mess. (+92%)
10. Bombay SE - 2005 figure was 380 bn and the current is 1,263 bn. Despite the massive correction for India over the last 6 months, it is still in pretty good shape overall. (+232%)
Now the REALLY INTERESTING PART, we should compare apples to apples .... since 2005 how has Bursa Malaysia fared compared to our neighbours, bring out the tissues.
2005 Market Cap 2013 June Market Cap
Malaysia 184 bn 490 bn (+166%)
Singapore 227 bn 752 bn (+231%)
Indonesia 77.6 bn 477 bn (+514%)
Taiwan 433 bn 754 bn (+74%)
Shenzhen 125bn 1,190 bn (+852%)
Philippines 32.4bn 230 bn (+609%)
Korea 459 bn 3,051 (+564%)
Thailand 122 bn 408 bn (+234%)
The way its going ... the 3 highlighted countries lagged Bursa substantially in 2005. Indonesia looks likely to surge past Malaysia by end 2014 despite the recent massive correction there. Thailand has come up by leaps and bounds despite numerous vicious street protests, disquiet down south of Thailand and changes in government. Thailand looks set to over take Malaysia by sometime end 2015. Now the Philippines ... soon Malaysia will be sending maids to the Philippines ... fuckers!!! Maybe not now but look at the trend, I predict by 2018 the Philippines will bypass Malaysia if nothing changes.
Indonesia has really surged, you cannot just argue that it was from a low base because we are not really using figures from 20 years back. its only 8 years back. We have to look at why we lagged behind, has our growth stunted, have we maxed out? I mean, not just Indonesia, look at Thailand beating us by a comfortable 68%. Singapore is Singapore, fair enough. But just watch the Philippines.
We also cannot use the argument that we are maxed out, or that the best days are behind us, look at fucking Korea, they continued to post enormous productivity gains. I mean just Samsung stock alone, its market cap is 190 bn or 38% of Bursa Malaysia all stocks.
Something went very wrong over the last 10 years. We had no subprime crisis to speak of, and now we are talking of maybe even being part of the emerging markets sell down? We OBVIOUSLY did not invest well, we OBVIOUSLY had too much leakages.
You can either pooh-pooh these statistics as another angry commentator going ballistic or take the reality and DO SOMETHING CONCRETE about it because if we stay roughly the same, we will have the same end result over the next 8 years. Fuck the sloganeering ... the problems are so much more deep seated.
p/s some of our problems:
Ratio of public servants to total country's population